16 March 2023
Yesterday’s budget saw several changes that directly impact workplace benefits – in particular Pensions, Group Life Assurance and Childcare Provision.
In its Spring Budget Statement, the government quotes ‘Workers aged over 50 left the labour market in the greatest numbers during the COVID-19 pandemic. To encourage this group to extend their working lives, the government is increasing tax relief on pensions and making other reforms. These reforms will help ensure that high skilled individuals such as NHS clinicians are not disincentivised from remaining in the workforce.’
Let’s take a closer look at what has been announced.
Pension Lifetime allowance (LTA)
The pension lifetime allowance is the maximum amount of pension savings an individual can build up over their career without having to pay additional tax charges. Up until now, any pension funds that exceeded the LTA would be subject to the Lifetime Allowance charge of either 25% (where funds are drawn as income) or 55% (where funds are taken as a lump sum). The LTA limit currently stands at £1,073,100 and was frozen at this amount until April 2026.
However, the government has announced that the Lifetime Allowance charge will be removed from April 2023 before the Lifetime Allowance is abolished entirely from April 2024.
The government also confirmed that the maximum tax-free cash payable for individuals without historic LTA protection will remain at £268,275 and not increase in future. This figure is 25% of the current LTA of £1,073,100.
Group Life Assurance Schemes (GLAS)
The introduction of the lifetime allowance in 2006 created an added complication – the limit also included any benefits paid from a Registered Group Life Assurance Scheme. This was never the intention, but it has meant that for the last 17 years many organisations have implemented ‘excepted’ schemes which fall outside of pensions legislation. These types of schemes can be more rigid and complicated than registered schemes, and the announcement of the removal of the lifetime allowance gives an opportunity to review and revert existing schemes back to a more flexible and tax-efficient registered basis.
Pensions Annual Allowance (AA)
The AA is the maximum amount of money an individual can pay into their pension in a tax year without penalty. The AA is currently £40,000 for the tax year ending 5th April 2023.
The government has announced that this allowance is set to increase by 50% from £40,000 to £60,000 with effect from the 6th April 2023. The ability for individuals to ‘Carry Forward’ any unused annual allowances from the 3 previous tax years will also remain available.
The AA is tapered for high earners who have ‘adjusted income’ of over £240,000. The maximum reduction is £36,000 where an individual’s adjusted income reaches £312,000 or more. This restricts the amount of money an individual can pay into pension to £4000.
The government has announced that this allowance will increase from £4000 to £10,000 with effect from the 6th April 2023. At the same time, it will increase the ‘adjusted income’ threshold from £240,000 to £260,000.
Money Purchase Annual Allowance (MPAA)
Any individual taking income from a flexi-access drawdown plan or using an uncrystallised funds pension lump sum will trigger the current MPAA. This effectively restricts the amount of money an individual can pay into their pension to £4000.
The government has announced that this allowance will increase to £10,000 with effect from the 6th April 2023.
All parents of children in England aged nine months to school age will get between 15 and 30 hours a week of funded childcare from the moment maternity or paternity leave ends. Initially, children aged two will have access to 15 hours of free childcare from April 2024, followed by children aged from nine months from September 2024. This is designed to allow more parents to return to work. For employers, this is likely to be an opportunity to review areas such as flexible working & reduced hours policies, as well as benefit regimes, to ensure they meet the needs of additional working parents entering the workforce.
Verlingue welcome these announcements and in particular, the enhancement of free childcare & the removal of the LTA. Over the last decade this allowance has been gradually reduced from its high of £1.8m bringing many more individuals who have diligently funded pensions for their retirement into the scope of a potential LTA charge. And allowing more parents to re-enter the workplace will help to alleviate the current recruitment challenges many UK businesses face.
Here at Verlingue we specialise in employee benefit & consulting and advisory services. If you have any questions or would like to discuss the changes in more detail, please get in touch with your consultant or contact Rob Marshall, Director at firstname.lastname@example.org