From 6 April 2023 you could be limited to £10k pa pension contributions after taking flexible income – unless you take action now!
Taking advantage of the new pension flexibilities after 6 April may mean your future annual contributions are restricted to a maximum of £4k for tax year 2022-2023 (rising to £10k from 6 April 2023).
This is known as the Money Purchase Annual Allowance (MPAA).
What is the MPAA?
Everyone has an annual allowance which restricts how much you can pay into your pension pot(s) each year. When you start to draw from your pension – though a few exceptions apply – this allowance is replaced by the MPAA.
Currently, the annual allowance each year is £40k and you can carry forward unused allowances from the previous 3 years.
The MPAA can work in different ways depending on the tax year.
In the first tax year in which you draw your pension, the MPAA is only applied to contributions you make after the MPAA is triggered.
In every tax year following, all contributions will be affected by MPAA.
What are the rules?
MPAA lowers your annual pension contribution allowance once you start to access your pension pot(s).
There are a number of events which can trigger the MPAA, including (though not limited to):
- Taking the entirety of your pension pot(s) in a lump sum
- Taking a series of taxable lump sums
- Setting up a drawdown scheme with your pension and taking income from that
It is important to note that the MPAA does not replace the annual allowance rules or reduce the annual allowance.
What are the opportunities?
Those that are not taking any income from their pensions, will benefit from taking a small amount of income or lump sum before April, in order to protect the ability to contribute £40k pa after April and take income from their pension funds at the same time (up to the existing maximum income limits). If no benefits have been taken by 6 April 2023, then as soon as any amount of income is taken flexibly, you will be restricted to the new £10k pa contribution limit (MPAA).
It would be possible to extract cash from a business tax efficiently by contributing to the pension instead of taking salary. For example, £40,000 could be paid into a pension instead of salary or dividends which is deducted from company profits for tax purposes. No National Insurance would be payable by the employer or the employee, unlike salary. The £40k could then be paid out from the pension with 25% tax free.
This is only a case study and does not constitute advice. Anyone considering any form of financial planning should seek independent financial advice. First Wealth LLP is an appointed representative of Best Practice which is authorised and regulated by the Financial Conduct Authority (FCA).
You should note that the FCA does not regulate tax advice.
This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.