The Chancellor, Jeremy Hunt, announced the 2023 Spring Budget to Parliament on Wednesday.
Alongside spending plans to help households with the cost-of-living crisis, there were several changes to pension savings limits.
Please read below to learn about some of these key changes and what the new rules might mean for you if you are an American living in the UK.
The Annual Allowance
The pension annual allowance is the gross amount of total pension contributions an individual can make to UK pension schemes in a tax year. This will include contributions to personal schemes (for example a self-invested personal pension – also known as a SIPP) and contributions to employer schemes (both employer and employee amounts).
The maximum annual amount is currently £40,000 and has been capped at this level since 2015. This amount is also tapered down to a minimum of £4,000 based on your income levels.
It is possible to use carried forward allowances from the prior 3 years in certain circumstances. If you contribute above your allowance for the year, then an annual allowance income tax charge (AAC) can arise on excess savings.
Budget Changes
It was announced in the budget that from 6 April 2023:
- The annual allowance will be increased to £60,000 per year.
- The minimum tapered annual allowance will be increased to £10,000 per year.
- The adjusted income level required for the tapered allowance to apply will increase from £240,000 to £260,000.
The lifetime allowance
The lifetime allowance is the total amount that can be saved into all your UK registered pensions schemes before a lifetime allowance tax charge (LTA) will apply. This is currently at a 55% rate if the excess is taken as a lump or 25% if taken as an income.
The lifetime allowance is currently £1,073,100 for the 2022-23 UK tax year and has remained at this level for the past 3 years.
Budget Changes
It was announced in the budget that from 6 April 2023:
- The Lifetime Allowance (LTA) will be abolished completely.
- The 25% tax free lump sum will be capped at £268,275 (25% of the current LTA of £1,073,100.)
How does this impact me as a US taxpayer in the UK?
The increases to both the annual and lifetime allowance allow for increased savings to UK pension schemes. There are number of implications if you are a US taxpayer living in the UK:
UK Income Tax Relief
Contributions to UK pensions provide UK income tax relief. Additionally, pensions are tax-deferred accounts, which means investments within the account can grow without being subject to tax on an annual basis.
As UK income tax rates are typically higher than US income tax rates, contributing to UK pensions is an attractive way to reduce this additional income tax exposure.
UK Inheritance Tax Relief
UK pensions are not subject to inheritance tax in the UK. Therefore, maximising your annual pension contributions to UK schemes is a way to reduce inheritance tax exposure.
As inheritance tax limits in the UK are significantly lower than the US estate tax exemption, UK pensions should be considered as part of your wider estate planning if you are a US person living long-term in the UK.
Opportunities
As a result of these changes, a few opportunities have come to light which should be considered:
Carry Forward Allowances
Pension savings have been restricted since the introduction of the LTA in 2006. As a result, many people have forgone using their annual allowances and used these funds elsewhere. Now that the LTA has been abolished, this brings about the opportunity to make up for missed contributions.
Over Contributing
With UK pensions being out of your estate, it might be worth considering contributing and suffering an annual allowance tax charge to increase your pension wealth.
Foreign Tax Credits
This opportunity has always been there but more so now. By contributing a large sum into your pension, you will bring the UK tax rates down, and possibly below your US rates. This gives you the chance to use some of those foreign tax credits.
