NIC and pension tax limits: What do the changes mean for you?

NIC and pension tax limits: What do the changes mean for you?

A recent extension to the National Insurance Contribution limit deadline means that those who wish to bridge gaps in their NIC record now have until July 31st to do so. And with new pension tax limits announced in the Spring Budget last week, what does this mean for pension?

A flurry of legislative changes have recently been announced affecting UK state and private pension pots.

Earlier this month it was announced that the current National Insurance Contribution (NIC) window will be extended to July 31st, allowing those who wish to bridge gaps in their record an extra three months to do so. Contributing to your NIC record and achieving the new state pension, requiring 35 ‘qualifying years’ worth of contributions is imperative in securing a financial safety net for retirement. 

However, with more major changes announced in the Spring Budget to pension tax limits which are set to come into play this year, here are the 6 key pension limit changes you need to know and your next steps:

6 Key tax pension limit changes

Due to be introduced in the Spring Finance Bill, and come into effect on April 6th 2023, major changes to pension tax limits are set to allow greater freedom when it comes to private pension contributions whilst allowing those who wish to stay in work for longer to do so without facing a hefty tax hit.

1. An increase in the annual allowance

The annual allowance limits the amount you can contribute to your pension pot whilst benefiting from tax relief on your contributions. Changes to the amount you can contribute are set to come into play this April.

After a 9 year freeze, the annual allowance will be increased from £40,000 to £60,000, offering a real opportunity to significantly boost your pension income with an extra £20,000 a year qualifying for tax relief.

2. A higher threshold for tapered annual allowance

Changes to the tapered annual allowance were announced in the Spring Budget, specifically affecting high earners who had previously faced a reduced annual allowance when their adjusted income exceeded £240,000, or if their threshold income exceeded £200,000. It was announced that the threshold would be raised to £260,000 with a minimum tapered amount of £10,000 as of April 6th 2023.

If you earn over £240,000 of adjusted income, or over £200,000 of threshold income, you will now be eligible to an extra £20,000 worth of tax relief on your pension contributions. Your annual allowance taper won’t kick in until hit the new adjusted income threshold of £260,000.

3. Leaving behind the lifetime allowance

The lifetime allowance is the limit you can build up to on pension benefits throughout your lifetime whilst enjoying the full tax benefits on offer. The allowance currently stands at £1,073,100 across all pension schemes, with anything exceeding this being subject to a potential lifetime allowance charge. This is usually a 55% tax on anything above the lifetime amount on lump sums and 25% tax charge on payments or cash withdraws.

Announced in the Spring Budget, this charge will be scrapped as of April 6th 2024. If you are one of the many people who may have stopped contributing to your pension because of the lifetime charge, now is a great time to review your savings and consider contributing again.

4. Money purchase allowance (MPAA)

Money purchase schemes are a common way of growing your pension pot through investing the money you put into the scheme with the aim of gradually growing your money for when you retire. The amount you receive will be a combination of your investment and how it’s performed over the years.

The money purchase allowance (MPAA) is a reduction to the tax-free annual allowance for those who have accessed their money purchase pension savings. Once accessed, MPAA will limit the amount of tax relief you will be able to utilise on future contributions into the scheme.

The money purchase allowance will now be raised form a £4,000 tax free contribution allowance to £10,000 a year. This is a great change for those seeking more flexibility with a smaller tax repercussion.

5. A 25% limit on the pension commencement lump sum

The pension commencement lump sum is due to be limited to 25% of the current lifetime allowance, meaning that the most you will be able to withdraw from your pension tax-free when you begin to access your pension is £268,275.

However, it’s worth noting that this may different where previous protections apply.

6. Additional lump sum changes

We will see some additional changes to the following lump sum legislation: Allowance access lump sum, serious ill health lump sum, defined benefits lump sum death benefit and uncrystallised lump sum death benefit.

Instead of being taxed at 55% on anything above the lifetime allowance, this will be changed to an individual’s marginal rate, making for a fairer overall system.

Next steps...

Review

National Insurance Contributions

Having full visibility of your contributions so far is the first step in ensuring you achieve your retirement goals, and for many this includes a full state pension entitlement.

You can check your National Insurance record on the HMRC website which will provide everything you need to know, including a full summary of all your contributions up to the current tax year.

Private pension contributions

Now is the perfect time to take stock of what you’re currently contributing.

This will not only allow for greater insight into what you currently have, you’ll also be able to see if anything needs to be adjusted according to the new pension tax limits. Doing this will allow you to contribute and grow your pension pot more this following financial year.

Check

National Insurance contributions

But knowing what you’ve already contributed is only half the battle. Ensuring the information on your record is in line with your salary and that you’ve received any credits you’re entitled to will ensure that you’re on track to receive the right amount.

Additional errors to look out for include dates, contribution bands and gaps in your record where there shouldn’t be.

Private pension contributions

If you have opted into a money purchase scheme, you should check how your pension is performing based on the investments that your provider has chosen for you.

Calculate

Your pension income

Once you have reviewed your voluntary contributions, checked for any errors in your record and decided your retirement age, you can calculate your estimated pension pot. This is based upon what has been paid into your NIC so far and how much you plan to pay in the years leading up to your retirement.

If you are contributing to a money purchase scheme, it can be hard to predict just how your pension contribution will perform in the following years. Knowing how it’s currently performing, however, can give you a good estimate of how much you could receive when you retire.

Life can be unpredictable, and it’s not always the easiest or even possible to come to a precise or guaranteed figure. And with the ever-changing legislation and tax landscape surrounding your benefits it can be hard to know what the best course of action is.

Seek advice from an expert

Speak to our qualified tax advisors who can offer you their technical expertise and guidance regarding the nuanced tax legislation surrounding your pension contributions today.