Upcoming Pension and Tax Changes: Your questions answered

With Labour’s first budget just under two months away, it might feel like a long time to wait if you’re nervous about what’s going to happen to your finances. But there’s no need to worry.

Our clients have had lots of questions recently relating to their pensions and tax. The budget isn’t until the end of October – which means there’s plenty of time for headlines and gossip to accumulate, so it’s understandable if you’re concerned about potential changes too.

We know the government has warned people may have to “accept short-term pain for long-term good” but what does this really mean?

We regularly help our clients look behind the headlines, so they can focus on what they need to do for better pension planning.  Here are some of the questions we’ve helped our clients with. We hope they help you too:

Is Labour bringing back the lifetime allowance?

Let’s get this one out of the way first.

The lifetime allowance (LTA) was one of the big talking points in the last two budgets. It limited what you could put away tax-free. Pensions with more than the £1.07 million limit faced, on average, an annual tax of £40,000. [1]

It was finally scrapped in April this year, but before the election Labour said it would reinstate it. This proposal has been reversed (in part because putting it back in would be too complicated).

As we’ve discussed in last month’s blog, the LTA has been replaced by three new allowances, the lump sum allowance (LSA), which allows you to take 25% tax-free from your pension once you reach 55 (up to a maximum of £268,275); a lump sum and death benefit allowance (LSDBA) of £1,073,000, which covers the tax-free benefits you receive both during your lifetime and for any beneficiaries; and the overseas transfer allowance (OTA), which regulates the tax treatment of transfers to qualifying recognised overseas pension schemes.

There’s still a limit on what you can withdraw as a tax-free lump sum. This is capped at £268,275, although in some circumstances you can withdraw above this level tax-free.

What’s happening to pension tax relief – am I going to be worse off?

This is a potentially big one. Chancellor Rachel Reeves has made no secret that her October budget will include some tough decisions. One area in her sights is pension tax relief.

On the table is potentially switching to a flat rate, instead of based on your marginal rate. A flat rate of 20% wouldn’t mean any changes for basic-rate taxpayers – but would mean a large reduction for those in higher tax brackets, who are used to receiving relief of 40–45%. Another suggestion is setting the rate slightly higher – at 30%.

An additional potential suggestion is reducing the maximum tax-free lump sum. A report from the Fabian Society suggests cutting this to £100,000 or 25% of your total pension wealth, whichever is lower [2].

Other areas that could come under the spotlight are capital gains tax, where the tax-free allowance is currently £3,000; inheritance tax, where the threshold for when you start to pay is currently frozen at £325,000 until 2028; and even the annual allowance you can pay into your pension (currently set at £60,000).

It’s important to remember though, nothing is set in stone yet.

What are my options if there are changes?

Even if the Autumn budget contains nasty surprises, there are always options. One we always make sure to remind clients about is the option to carry forward their pension allowances. You can do this for unused allowances from the previous three tax years to help maintain your tax efficiency.

Business owners could make use of these allowances, providing they’ve been part of a registered pension scheme during that time.

If you’ve not made any contributions in recent years, the carry forward rule could mean you can contribute up to £200,000 to your pension.

Can I still protect my pension?

You may still be able to apply for fixed or individual protection of your pension if it was at risk of exceeding the previous LTA limit. These protections can give you a higher LSA or LSDBA. The deadline for applications is 5 April 2025. If you think this affects you, please get in touch.

What pitfalls do I need to watch out for as a higher earner?

One area we regularly highlight to clients is potential income tax traps. For example, the 60% income trap we discussed in our 6 thing you need to know about pension planning blog.

There’s another one to watch for involving child benefit that could affect many parents where one or more of the household is a higher earner.

Once you earn over £60,000 you pay a charge on a sliding scale. If your income is over £80,000 the charge is equal to the full amount. The income trap that many aren’t aware of is when your taxable income goes above £100,000. Then you lose all childcare benefits, including tax-free childcare and additional free childcare. The £100,000 limit has been in place for several years but hasn’t been adjusted for inflation. This means thousands more parents could find themselves in this childcare tax trap in future years.

So, should I be worried?

In short, no.

Speculation is just that. While reforms have been put forward and some are more certain than others, nothing is confirmed until the new chancellor speaks at the dispatch box in October.

And even when it does, helping adjust your plans and keeping you on the front foot is a critical part of what we do. We are always working behind the scenes, looking at what impact changes will have, then tweaking your plan to make sure your finances are optimised.

Take our client Don, who came to us when he was approaching early retirement as he was uncertain about his options. Our financial planners showed him how he could take his pension benefits in a more flexible way, meaning he would avoid excessive tax charges. The government’s decision to scrap the lifetime allowance allowed him even greater flexibility which meant he could leave more money in his pension than first planned. Read Don’s full story.

If you’ve got questions about how the potential changes could affect you, get in touch with us.

[1]Source: BBC News

[2] Source: The Guardian