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The Spring Budget headline for advisers was unquestionably the scrapping of the lifetime allowance charge from the start of the new tax year. These measures were confirmed in the Finance (No.2) Bill published on 23 March 2023.

The draft legislation confirmed the LTA tax charge will not apply for 2023/24 although the LTA and the concept of crystallisation events will remain in place. Existing pension rules which rely on the LTA, such as entitlement to tax free cash, will continue to apply.

The Finance Bill also contained modifications to the various protection regimes and how certain lump sums in excess of the LTA will be taxed.

The Finance Bill changes

Lifetime allowance charge

The current LTA of £1,073,100 will not be abolished until 6 April 2024. In 2023/24, LTA checks still need to be done, but if the allowance is exceeded when benefits are taken during the member's lifetime there won’t be an LTA charge. Any excess is simply taxed as income in the normal way.

This means that when deciding on future pension funding, the potential for an LTA charge does not need to be factored in.

Even if clients have already funded for maximum tax free cash under the new rules, there may still be a case for continued funding if the tax rate on withdrawals is no worse than the initial tax relief. And, of course, a pension typically shields savings from IHT.

During the investment term pension savings will continue to 'grow tax free' in the same way as an ISA, which will have added value from April following cuts to both the capital gains tax and dividend allowances.

Tax free cash

There has always been the ability for an individual to take some of their pension benefits as a tax free lump sum (the pension commencement lump sum), with a general limit of 25% of the amount crystallised, up to a maximum of 25% of the available LTA. The maximum tax free cash (TFC) will be capped at £268,275 which is 25% of the existing £1,073,100 LTA.

Existing tax free cash protection

Since 2006, there have been a number of protections available that maintain a right to higher levels of tax free cash than the standard amount. These protections are to continue, subject to limits in some cases.

• Enhanced Protection
  
  Tax free cash could be registered for enhanced protection at the same time as applying for enhanced protection on total pension savings. To be eligible, TFC rights had to be more than £375,000 (25% of the original LTA) when simplification started in April 2006. This protection will be capped at the TFC value on 5 April 2023. New contributions can be made after 5 April 2023 without losing this protection, but they will not generate any new tax free cash entitlement.
• Fixed protection
  
  Fixed protection was available at different levels in 2012, 2014 and 2016. Again the main condition was that no further contributions were paid after the date the relevant protection came into force.
  
  From 6 April 2023, fixed protection on the total value of pension savings will not be needed as there will be no LTA charge. But it will still be relevant in determining an individuals' rights to tax free cash.
  
  Provided protection was applied for before 15 March 2023 and the client holds a valid certificate, tax free cash protection of up to 25% of the fixed protection amount will not be lost, even if new savings are made from 6 April 2023.
• Primary protection and individual protection
  
  These rights are not specifically mentioned in the Finance Bill, so they should continue unchanged for the coming year. Protected tax free cash rights registered as part of primary protection should continue and under individual protection, tax free cash should remain at the lower of 25% of the amount crystallising and 25% of the individual's remaining protected LTA. Further contributions can always be made without invalidating these protections.
• Stand-alone lump sums
  
  The amount that can be paid under these provisions will be limited to the value as of 5 April 2023.
  
  The stand-alone rules allowed a person who had tax free cash rights at 5 April 2006 of 100% of the value of their occupational pension schemes for a particular employment to take all of those benefits as cash.
• Scheme-specific tax free lump sums
  
  There was no reference to this form of tax free cash protection in the Finance Bill, so the method of calculation will remain unchanged for the coming tax year.
• Payment of lump sums
  
  Certain lump sums that would have been subject to the 55% LTA charge will be taxed at the recipient's marginal rate.
  
  These include serious ill-health lump sums, LTA excess lump sums, defined benefits lump sum death benefits, and uncrystallised funds lump sum death benefits. These are generally tax free up to the LTA, and then 55% afterwards. In 2023/24, they'll still be tax free up to the individual's LTA and then taxed at the recipient's marginal rate afterwards.

What is staying the same for 2023/24?

The Finance Bill didn’t contain whole swathes of new pension legislation. That will follow in a future Finance Bill when the rules for 2024/25 onwards are laid out. So the vast majority of existing pension rules will stay the same and will continue to reference an LTA of £1,073,100.

LTA testing

When any benefits are crystallised during 2023/24, the process of testing against the LTA will continue as normal, but anything over the LTA won't incur the LTA tax charge (though see the section on certain types of lump sum benefit).

This also means that the calculation of the available tax free cash, for those without any lump sum protection, will also remain the same as this year - an individual will be able to get the lower of 25% of value of the benefits crystallising and 25% of their remaining LTA.

The annual allowance changes confirmed

The Finance Bill confirmed the Budget announcement that the annual allowance will increase to £60,000 from 6 April 2023.

The adjusted income threshold also rises from £240,000 to £260,000. However, the threshold income figure is to remain at £200,000.

The minimum tapered annual allowance will increase from £4,000 to £10,000, with the same increase for the money purchase annual allowance (MPAA).

What happens next?

The Finance Bill will be debated in Parliament before becoming the Finance Act and receiving Royal Assent. The new legislation will not be fully enacted until well into the new tax year but will apply retrospectively from 6 April 2023.

HMRC will continue to give updates via their Pension schemes newsletters as information becomes available and, of course, we will keep advisers updated on Techzone as things develop.