Lowes Magazine Issue 128

PENSIONS

Pensions Lifetime Allowance and protection

Expect to pay more tax on your savings

In the past, the Lifetime Allowance, the amount an individual could pay into their pension in their lifetime without incurring a tax charge, was as much as £1.8million. Over the years, successive government policy changes reduced this to £1m before it increased again to £1.073million where it was frozen until 2026. When the lifetime allowance was introduced in 2006, ‘enhanced’ and ‘primary’ protection allowed pension scheme members to protect benefits over, or likely to be over, the new limit. Every time the limit was reduced HMRC introduced new protections, Fixed 2012, 2014 and 2016 and Individual 2014 and 2016, ensuring those who might breach the lower figure could protect the higher amount. Now that the penalty for exceeding the lifetime allowances has been reduced to zero and the allowance is proposed to be abolished from April 2024, the question is, can those with these protections start to pay into a pension again without losing them? Anyone who registered for protection by 15 March 2023 (and who didn’t invalidate or revoke it before 6 April 2023) cannot lose their protection. They can now pay into an existing pension again, transfer pensions and start new arrangements without being worried about invalidating the protection. However, those who registered for protection after 15 March 2023 can still lose their protection, as the old rules continue to apply in these cases. For anyone who has already accessed their pension, their annual allowance for money purchase pension contributions is £10,000 per annum. High earners also may have their annual allowance tapered to between £60,000 and £100,000. The annual allowance maximum contribution for the 2023-24 tax year has been increased to £60,000. Unused allowance from the previous three years (at £40,000 each year) can also be used, which means there is a potential to pay in up to £180,000. The allowance is used up by your own, your employers and any third-party pension contributions made to your pension and also by the increase in any salary related benefits you have. If you hold one of the protections and would like to discuss contributing more to your pension, take advantage of the three year rule, or want to transfer or start a new pension, please call us on 0191 281 8811.

The Bank of England has been increasing the base rate of interest incrementally since December 2021 to curb rising inflation. While the Bank held off raising rates in September, keeping the base rate at 5.25%, there will be many people with savings now earning a decent rate of interest for the first time in the last 14 years. However, changes to the Personal Savings Allowance is likely to see increases in the amount of interest received on cash accounts, pushing more people into having to complete an annual self-assessment tax form and pay tax on their savings. For the 2023-24 tax year the Personal Savings Allowance is: £1,000 for basic rate tax payers, £500 for higher rate and £0 for additional rate payers. Any interest payments over that amount will be taxed at the individual’s marginal rate of tax. Interest which HMRC takes into account includes that from bank and building societies, investment vehicles, government or company bonds, trust funds, life annuity payments and some life insurance contracts, amongst others. For joint account holders, the interest is split equally between them. If you have £50,000 on deposit now earning say 5%, which maybe earned 1% this time last year, you stand to gain an extra £2,000 interest. Ignoring the personal savings allowance, you could be liable to an extra £400pa in tax if you remain a basic rate taxpayer or £800 if a higher rate taxpayer. One danger is that you might well have locked up your savings into the next fixed offer but now you will need to think about holding cash in a more accessible way to pay your higher tax bill. It is now more important than ever to be putting money into tax efficient savings and investment vehicles. Personal pensions have the advantage of a 25% uplift on payments made into them, through tax relief, for longer term saving. And UK savers can shelter up to £20,000 each tax year in an ISA, which are tax free for income and investment growth.

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