Spring Budget 2023
Jeremy Hunt, the UK’s fourth Chancellor in the past 12 months, delivered his first Budget last week. Mr Hunt’s tenure last autumn began with some rapid back pedalling on unfunded tax giveaways to stabilise UK financial markets, which were in panic mode thanks to the substantial giveaways announced by the previous Chancellor Kwasi Kwarteng.
Last week’s Budget was an attempt to deliver a plan for long-term sustainable economic growth with several new incentives including new investment allowances for businesses, more assistance with childcare costs and scrapping tax-free limits on pension plans in an effort to discourage early retirement.
22nd March 2023
Gavin Jones See profile
A surprise was the intention to abolish the Pension Lifetime Allowance (LTA), the maximum amount that can be saved in a pension without attracting a penal tax charge. The rumour of change had been widely reported in the media before the Budget announcement. Doctors in the NHS pension scheme in particular have been hit by the current tax regime and an increase in the LTA was seen as a way to encourage those that had already retired back to work and discourage some from retiring early. The expectation was a raising of the cap back to the highest level it reached of £1.8 million over ten years ago. The removal of the cap completely therefore was unexpected.
From Thursday 6 April 2023, no-one will pay a LTA charge and from Saturday 6 April 2024, the Finance Bill will remove the allowance completely from pensions tax legislation.
At present, once you have a pension scheme above the LTA (£1,073,100 or higher if you have previously protected the limit) and you take benefits – a lump sum or income or at the latest once you reach the age of 75, there is a tax charge due. If a lump sum is taken there is currently a 55% charge or it is possible to take the fund as income which has a 25% charge plus it will also be assessed to Income Tax. Both of these tax charges will no longer apply from the new tax year.
Pension Commencement Lump Sum
There will, however, be a cap on the tax free cash lump sum at 25% of savings subject a maximum of £268,275 (25% of current LTA).
Existing lifetime allowance protections may still be relevant as they will offer higher protected tax-free cash amounts. However, those who hold a valid enhanced protection, or any of the fixed protections will be able to accrue new pension benefits and join new arrangements without losing their protection provided the protection was applied for before Wednesday 15 March 2023. Therefore, individuals who hold these protections can make further contributions from the Thursday 6 April 2023 without impacting their higher protected tax-free cash amounts and without suffering any LTA charges.
Impact of the changes
Pension providers must, for the time being at least, continue to carry out tests against an individual’s remaining lifetime allowance to see if any portion of the payment needs to be taxed. It is essential that you do not crystalise new pension benefits above the LTA before Thursday 6 April 2023 as the tax charge will still apply. Unfortunately, some will not have that choice; those that reach the age of 75 or who die between now and Wednesday 5 April 2023 will still be taxed under the old rules.
It is also important that where Lifetime protection is in place and benefits have not yet been drawn, no pension contributions are paid before Wednesday 5 April 2023 as this could reduce the tax free cash sum that can be drawn in the future.
Advice will be different for everyone based on your circumstances but if you have previously restricted pension savings or changed aspects of your pension, for instance how it is invested, due to the LTA restriction this should be reviewed.
In recent years company death in service schemes, especially for high earners may have been set up via excepted life policies or relevant life policies which are not subject to the usual lifetime allowance limits. The changes may mean, at least in the short term that these are not needed.
There is certainly opportunity but in response to the announcement, Labour have already said they would reverse the LTA change in favour of a more targeted scheme for NHS staff if they get into Government. This makes long term planning very difficult and could mean a limited period in which substantial pension funds could be crystalised or additional contributions made for those over the LTA before higher levels of tax are reintroduced.
The chancellor also announced that the Annual Allowance, the limit on tax relievable pension savings an individual can make in a tax year, will increase from £40,000 to £60,000 from Thursday 6 April 2023.
With the increase in Corporation Tax from April, deductible contributions to registered pension arrangements and relevant life policies will become even more attractive.
Money Purchase Annual Allowance (MPAA)
In addition, the MPAA – the limit on money purchase pension savings an individual can make after accessing benefits in the form of income, will increase from £4,000 to £10,000 from Thursday 6 April 2023.
Tapered Annual Allowance
The minimum amount of the Tapered Annual Allowance (which can apply to those earning in excess of £200,000 per annum) will also increase from £4,000 to £10,000 from Thursday 6 April 2023.
There has been an ongoing review of State Pension age and whether the current timetable for changes is still appropriate. The Government have said they will publish their response by May this year. With the minimum retirement age for personal pensions set to increase to 57 in 2028 and 10 years below the state pension age thereafter this may have implications on retirement plans for some.
The adult ISA allowance will remain at £20,000 for the tax year 2023/24. The Junior ISA allowance and the Child Trust Fund allowance will also continue to be £9,000 in the upcoming tax year.
Following a consultation which ran from April-June 2022, the Government has announced its intention to legislate the following outlined proposals as part of a pack of simplification reforms from the 2024/25 tax year onwards:
- Trusts and estates with income up to £500 will not pay tax on that income as it arises. Where a settlor has made other trusts, the amount is the higher of £100 or £500 divided by the total number of existing trusts (subject to some exceptions). This concession used to only apply to bank interest, but now applies to all types of income.
- The default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income has now been removed. For trusts with income over £1,000 this will mean an additional liability of up to £306, depending on the type of income and the number of existing trusts made by the same settlor.
- Beneficiaries of UK estates will not pay tax on income distributed to them that is within the £500 limit for the Personal Representatives. This formalises the existing concession and extends it to include all types of income.
Please speak to your financial planner if you want to discuss your individual circumstances regarding the changes announced in the Spring Budget.