The Chancellor, Jeremy Hunt, presented his 2023 Spring Budget to Parliament on Wednesday, with the main theme of the Budget targeted at tackling the UK’s productivity issues, with the aim to encourage those economically inactive back to work.
Whilst there were no major mainstream tax cuts, the Budget was not short of a few surprises, including the significant changes to pension taxation with the announcement of the abolition of the Lifetime Allowance (LTA) tax charge. This will likely encourage additional contributions to pensions especially from those who may have stopped contributing due the additional tax charges that apply for pensions over the Lifetime Allowance limit. These measures have been put in place to try to entice early retirees such as doctors back to work.
Below is our initial interpretation of some of the headline financial announcements made to the House:
- No more Lifetime Allowance
Perhaps the biggest surprise in the budget was the removal of the Lifetime Allowance (LTA) tax charge from 6 April 2023, with the LTA then being completely abolished from 6 April 2024, giving pension providers time to adjust their systems. The current LTA is £1,073,100 and was previously frozen at this rate until 2026. This change means that pension benefits over this limit will no longer have a tax charge, potentially saving up to 25% in tax on the excess. This opens the opportunity for further funding, even where the LTA had previously been fully used.
The maximum tax-free cash clients can claim for those without protections will remain capped at 25% of the current LTA (£268,275) and will be frozen for the foreseeable future. Additional pension benefits where this limit has been exceeded will be taxed at the marginal rate of income tax. Those with existing Fixed and Individual Protection will still have their tax free cash limited to a higher amount, so keeping these protections can still be beneficial. It is currently unclear how additional contributions will affect anyone with existing protection and therefore those with existing pension protection should seek financial advice before considering new contributions.
- Annual Allowance increases
The Annual Allowance (AA) increases from £40,000 to £60,000 for 2023/24, having previously been frozen for the past nine years. This is the maximum gross contribution that can be made to a pension. Coupled with the abolition of the Lifetime Allowance, it is anticipated that this will encourage more pension contributions. Increasing the Annual Allowance also offers more scope to reduce your net adjusted income below certain thresholds, for example reducing your net income below £100,000 to reinstate your personal allowance.
The Money Purchase Annual Allowance (MPAA) increases from £4,000 to £10,000 for 2023/24. This is the rate for those that have already started to draw a taxable income for their Money Purchase pensions, in a bid to try and incentivise those who may have retired early to return to work.
The income level for the Tapered Annual Allowance to apply has increased from £240,000 to £260,000 and the minimum Tapered Annual Allowance will be £10,000 for those with income of £360,000 and above. These changes will be good news for higher earners who may now have scope to make additional pension contributions having previously been restricted.
- What many deem as a ‘stealth tax’, the government confirmed that the income thresholds will remain frozen until April 2028, meaning a bigger proportion of your earnings will go towards tax, as your earnings increase
- It was confirmed in the budget that the starting rate for savings would remain at the current level of £5,000 for the tax year 2023/24.
Capital Gains Tax
- The Capital Gains Tax (CGT) annual exemption will be cut from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024, as confirmed in the Autumn budget. This will also increase the amount of people who need to file a self-assessment return in 2023/24.
- The rates of CGT will remain unchanged at 10% for capital gains realised within the basic rate band and 20% for capital gains realised in excess of the basic rate band. The 8% surcharge for gains on residential property will also remain.
- Corporation tax will rise from 19% to 25% from April 2023 as originally planned. However, small companies with profits below £50,000 will continue to pay at the current rate of 19%. Companies with profits between £50,000 and £250,000 will pay between 19% and 25%
- Companies are now able to deduct investment in new machinery and technology to lower their taxable profits.
- Some good news for those that have reached or are near to their state pension, is the maintaining of the triple lock for the State pension which guarantees the 10.1% CPI increase for next April. This will increase the Full State Pension to £203.85 a week
- If you are coming up for retirement we would strongly encourage you to check your state pension forecast, as it is not too late to make voluntary National Insurance Contributions if you are not entitled to the full state pension. The Government has recently extended the voluntary National Insurance deadline to 31 July 2023 to give taxpayers more time to fill gaps in their National Insurance record going back to 2006. After this date you will only be able to make voluntary contributions for the previous six tax years.
The Budget presents several financial planning opportunities, especially around pensions and we have mentioned a few above.
Adding more into a pension not only increases your pension, but it may also reintroduce previously lost benefits such as:
- Child Benefit – if net income, through higher personal pension contributions, falls below £50,000 for the highest earner in a household
- Personal Allowance – if net income falls below £100,000. This is especially important with the threshold for paying the 45% additional rate of income tax falling from 6 April 2023.
By the same token, it may not always be beneficial to add more into a pension and potentially lose any previously protected Lifetime Allowance benefit, as your tax free cash entitlement may be lowered.
Finally, the long term debate between adding to pensions to reduce inheritance tax or paying extra tax on pensions, now looks to be more in favour of inheritance tax planning, but this is not necessarily the case.
Therefore, despite the perceived benefit of the greater freedom now around pensions, there are many pitfalls and so we would strongly recommend that you speak with your financial adviser at Headley Financial Services before making any changes.
We look forward to continuing to work with you and help you enjoy life enriched.
Past performance is not a reliable guide to the future. The value of investments and the income from them can go down as well as up. The value of tax reliefs depend upon individual circumstances and tax rules may change. This update is provided strictly for general consideration only and is based on our understanding of current law and HM Revenue & Customs practice. No action must be taken, or refrained from, based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case.
Main Source: HMRC