Budget 2023: annual allowance for pensions raised to £60k

The Chancellor will raise the pension annual allowance, the annual limit on tax-relieved pension savings, from £40,000 to £60,000

The increase will come into effect from April 2023 and this measure will cost £1.08bn over the next five years.

Some complexity will still remain as the Treasury has confirmed that the taper rate will remain. The adjusted income threshold for the tapered annual allowance will be increased from £240,000 to £260,000 from 6 April 2023.

Lewin Higgins-Green, head of EMEA employment tax & reward at FTI Consulting, said: ‘A 50% increase to the amount that can be saved tax efficiently into a pension from £40,000 to £60,000 will be welcome news for employees and employers, especially higher earners and those in defined benefit schemes.

‘However, the highest earners will still be hit by a reduction in the allowance through tapering, which can reduce the allowance to £10,000.

‘The threshold for tapering will be raised so that only those with adjusted income over £260,000 will be impacted – a further helpful measure for those highest earners, but leaving unnecessary complexity in the system which is unlikely to generate significant tax income for the government and still incentivises individuals to cease economic activity at certain levels.’

When the annual pensions allowance was introduced in 2006, the annual limit was £215,000, and this has been gradually eroded over the years in successive Budgets.

Russell Laver, pensions partner at EY, said: ‘The £20,000 increase in the annual pension allowance to £60,000 represents a welcome reversal after years of reductions and should encourage a greater number of people to put more into their pension pot. However, while the increase will benefit high earners, it will have no impact for the majority of the UK population.

‘The abolishment of the standard lifetime allowance (LTA), which previously stood at around £1m per individual, will also be welcomed by high earners who still have many years to build up retirement savings.

‘Although it will be less beneficial for those high earners who have opted out of pensions due to previous protections and who only have a few years to retirement, as they would likely end up breaching the annual allowance, and will not benefit lower earners.

‘These are wholesale and complex changes, and savers who can benefit should consider taking professional advice to ensure they are planning effectively for their retirement.’