Pensions changes for 2024/25 onwards – how they work
Pensions changes for 2024/25 onwards – how they work
Limits on pension tax relief and changes to inheritance tax
For higher earners, the ability to contribute into pensions was historically curtailed by two restrictions. The Annual Allowance (AA) restricts the amount a person can pay into a pension during a particular year. The Lifetime Allowance (LTA) seeks to cap the size of the fund that accrues during your lifetime.
These limits are perceived to cause practical problems. Whereas private sector workers caught within the restrictions can control their pension contributions, public sector workers usually cannot, as their employers will continue to contribute based on their earnings. In practice, the only way high earning public sector workers (such as senior NHS clinicians) are able to limit their exposure to AA and LTA charges is by restricting their earnings by choosing to work less, or retire (if only temporarily in the case of some healthcare professionals).
From 6 April 2023 the LTA charge was abolished and the limits for the AA were increased to “help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns.” However, the changes from 6 April 2023 apply to all pensions meaning individuals with large pension pots across all sectors of the economy can benefit from them.
From 6 April 2024 the underlying framework with regards the LTA was removed and substantial new legislation was introduced, broadly dealing with tax arising on and after retirement and introducing new terminology.
Budget 2024 brought more drastic changes for pensions with the effective abolition of the IHT exemption from 6 April 2027. This is perhaps not surprising, given the prevalence of defined contribution schemes (which can be inherited), and the abolition of the lifetime allowance charge in 2023.