Changes to the Annual Allowance (AA)

What’s the AA?

The AA is the maximum amount that you can save into all your pension arrangements (excluding the State Pension) every year without having to pay an additional tax charge. The AA is updated from time to time, so it’s important that you know the limit if you don’t want to pay any additional tax charges.

For the 2023/24 tax year, the AA is £60,000.

If you start to access your defined contribution pension saving, such as the Babcock Retirement Savings Scheme (BRSS), you may be subject to the Money Purchase Annual Allowance (MPAA), which is currently £10,000 a year. You can find out more about the MPAA on the MoneyHelper website.

If you’re a high earner

Your Annual Allowance is reduced if you’re a high earner – this is called the Tapered Annual Allowance. Since 6 April 2023, the taper reduces your AA if you earn over £260,000 a year from all sources (including employer pension contributions). Your AA is reduced by £1 for every £2 you earn above this, down to a minimum of £10,000. If your pension savings for the year are more than your AA, you’ll need to pay a tax charge.

The Lifetime Allowance (LTA) tax charge has been removed

Before April 2023, the value of your pension benefits (excluding the State Pension) when you retired was assessed against the LTA and, if the value of your benefits exceeded the allowance, there was a tax charge on the excess. The LTA for 2022/23 was £1,073,100.

This tax charge was removed in April 2023, and the LTA will be abolished completely from April 2024. This means that you can build up pension benefits without incurring a tax charge.

Tax-free cash lump sum at retirement

Whilst the LTA will be removed, when you take your benefits you can take a tax-free cash lump sum of up to 25% of the value of your pension pot, however, a cap of £268,275 will now apply to this lump sum. This is 25% of the previous LTA of £1,073,100.

If you previously had an LTA protection, this may protect the value of the tax-free lump sum amount you can take at retirement, if this is higher than £268,275.

You can find out more about the Lifetime Allowance on the Government’s website.