Corporation Tax has increased for all businesses reporting profits of over £50,000, with those with profits over £250,000 now paying up to 25%. If you’re a business owner, the removal of the Lifetime Allowance tax charge and the increase in the Annual Allowance could present an opportunity to reduce your Corporation Tax bill by making a pension contribution.

The Annual Allowance, which is the maximum amount you can contribute to your pension each year without incurring a tax charge, has been raised to £60,000. Additionally, you can carry forward any unused tax relief from the previous three years, potentially a total of £120,000. This means, in 2023/24 tax year, you could save a total of £180,000 tax-free into your pension pot, significantly boosting your retirement savings and potentially allowing for an earlier retirement.

If you’ve already started taking your pension while still working, you would have triggered the Money Purchase Annual Allowance (MPAA). This is the amount you can contribute to your pension tax-free each year. The good news is that this amount has increased from £4,000 to £10,000, meaning you can increase the tax-free amount both you and your employer can pay into your pension pot.

If you’d stopped paying into a pension because you’ve reached the Lifetime Allowance, you can now restart. The Lifetime Allowance charge has been scrapped, and the allowance of £1.073 million will be abolished in 2024. This means you can save as much as you want (up to the Annual Allowance of £60,000) tax-free. If you have enhanced or fixed protection, you won’t lose it if you restart contributions (provided protection was applied for before 15 March 2023 and is still valid).

Your beneficiaries don’t need to pay any inheritance tax on your pension savings if you die before the age of 75. If you die after 75, there’s no Inheritance Tax to pay, but they will face income tax charges based on their personal allowances.

The changes in the Finance Bill mean you can save as much as you want into a pension pot, subject to the annual limit of £60,000. To put this into context, NFU Mutual calculates that if you were to save the maximum annual allowance of £60,000 in a pension from April of this year and a further £60,000 for each of the next ten years, assuming 4 percent growth after charges compounding monthly, you could build a pot of £812,298. This would provide an inheritance tax saving of up to £324,919.

Although you may be able to reduce your heirs’ inheritance tax bill (see point 5), if your pension exceeds the historic Lifetime Allowance limit of £1.073m, you may want to consider the Income Tax they’ll need to pay.

If you die before 75, and your pension savings are below the historic Lifetime Annual Allowance, your beneficiaries won’t need to pay any income tax on your pension. However, due to the change in the Finance Bill, it’s likely that more pension funds will exceed this amount. If your pension is one of those, your beneficiaries will be required to pay income tax on the inherited pension savings. So, even if you no longer need to concern yourself with exceeding the Lifetime Allowance, you may want to ensure the full range of death benefit options are made available to your loved ones to help avoid this.

If these changes have prompted you to rethink your current pension and retirement plans an Amber River financial planner can help you make best use of the tax-saving, retirement, and estate planning opportunities. They will also be mindful of the potential reversal of these changes in future (should there be a change in government at the next general election).