Before the Chancellor stood up on 15 March to deliver his budget speech, we were all aware of the impact of rising inflation on the cost of living so many were looking to see what the Chancellor would do to help with this. In the few days prior to the budget there were many comments that perhaps the pension Lifetime Allowance limit may be raised from £1.073 million to £1.8 million. However, the changes with regard to pensions were far more than expected, there were few changes with regard to tax and trusts as these were introduced in the Autumn 2022 budget and some action with regard to provision of child care and energy costs.
Income Tax thresholds
The Autumn 2022 budget introduced the freezing of the personal allowance and higher rate tax thresholds at £12,570 and £50,270 until 5 April 2028 with the 45% additional rate applying on income above £125,140. This budget made no changes to these thresholds, so with inflation at its highest rate for many years, as income rises to compensate for this more taxpayers will become higher rate and additional rate tax payers, so for many their tax payments will increase in the 2023/24 tax year.
Tax on dividend income and Capital Gains tax
The reductions in the dividend nil rate band and the reduction in Capital Gains allowed before tax is levied introduced last autumn also remain.
Again, there are no amendments to the announcements in previous budgets. As a result, with effect from 1 April 2023 Corporation Tax will increase to 25% on profits over £250,000. For small businesses with profits of £50,000 or less the 19% rate will remain.
This budget made no changes to Inheritance Tax so the threshold is to remain at current levels until April 2028. The nil rate band will remain at £325,000 with the residential nil rate band remaining at £175,000. The nil rate band has remained the same since the 2009/10 tax year so has reduced significantly in real terms. This was once deemed as a tax that only applied to the wealthy, but more and more people are being drawn into the IHT net.
From a financial planning perspective, the big story of the budget is all the pension changes.
The rumoured increase in Lifetime Allowance (LTA) to £1.8 million proved to be wrong, as the Chancellor removed the limit completely. Technically the actual removal of Lifetime Allowance will not be until the 2024/25 tax year. For 2023/24 the requirement to calculate the percentage of LTA when benefits are taken will remain, but any benefit withdrawals in excess of LTA will not attract a charge. In effect the LTA tax rate is reduced to 0%. This is because it will take some time to unravel all the existing legislation which refers to Lifetime Allowance.
Those who had ceased contributions due to funds close to or above LTA, or who were concerned that investment return would lead to funds exceeding LTA, may now consider making further contributions and have the full benefit of good investment return without a tax penalty.
HMRC have indicated that anyone with a tax-free cash amount included as part of an existing protection should be able to retain this if it is higher than 25% of the current LTA. For everyone else the maximum tax-free cash will be 25% of the current LTA so £268,275. Similarly, anyone with scheme specific tax-free cash protection, in excess of 25% of their fund value, should hopefully retain this protection. However, the exact mechanisms relating to this protection have not yet been announced.
The Annual Allowance is the maximum amount of contribution that you can receive tax relief on in any given tax year. With effect from the 2023/24 tax year this is to rise to £60,000 from £40,000. The ability to use carry forward so that relief not used in the previous 3 tax years can be utilised will continue.
This will enable increased pension funding which may be particularly useful for those who will be paying additional tax rate for the first time with the reduction in threshold from £150,000 to £125,140.
Money Purchase Annual Allowance
If you have already started to draw benefits under the flexi-access drawdown rules you may make additional pension contributions, but only receive tax relief up to the Money Purchase Annual Allowance (MPAA). The Chancellor has increased the MPAA from £4,000 to £10,000 from the 2023/2024 tax year. The aim of this is to encourage people to return to the workplace and be able to benefit from the workplace pension arrangement.
Tapered Annual Allowance
These rules were brought in to restrict the level of contributions for anyone defined as a high earner. The minimum allowance will increase in line with the increase in the MPAA to £10,000. The threshold income is to remain at £200,000 but the adjusted income will rise to £260,000 to reflect the increase in Annual Allowance, with these changes applying from 6 April 2023. As now, £1 of allowance is lost for every £2 of adjusted income in excess of £260,000. As a result of these changes the minimum allowance will be reached once adjusted income reaches £360,000. At the moment the minimum allowance of £4,000 is reached when adjusted income reaches £312,000. After these changes, with adjusted income of £312,000 you would have an Annual Allowance of £34,000, which is a significant increase. There is a sliding scale of reductions to the Annual Allowance, depending on where the high earners level of ‘adjusted’ and ‘threshold’ income is between £260,000 and £360,000. The revised minimum allowance is £10,000 and this would be applicable where the adjusted income is £360,000 or more.
No change has been made with regard to the triple lock so State Pension will continue to increase by the higher of inflation measured by CPI, average increase in wages or 2.5%. Currently there are also no changes to the already in place provisions for increasing State Pension age which is now 66 for men and women born between 6 October 1954 and 5 April 1960 and then for those born later gradually increasing to age 67 by 2028 and 68 by 2046.
Overall with all the pension changes and the freezing of allowances, many will need to review their retirement planning to take advantage of the tax reliefs available in respect of pension funding.
It should be noted that none of the budget changes are law until the Finance Act receives Royal Assent, which is generally around the third week of July. For anyone currently holding one of the Lifetime Allowance protections, particularly where the protection provides tax-free cash in excess of 25% of the current LTA (i.e. £268,275), you should discuss matters with your usual Hanover consultant before making any additional contributions. It may be best to wait for the detail of all of these changes to be confirmed in the Finance Act, just to ensure you do not lose a valuable protection if the Government perform a U-turn on these proposals.
A key aim of the above changes is to encourage people to keep working or if already early retired return to the workplace. In particular the aim is to encourage senior doctors and medical staff to stay working as with the generous terms of the NHS scheme many have found that they face tax charges if they continue working and have decided to retire as a result.
With the rising cost of living, the main issue for many will be the increase in tax payments as a result of the freezing of the thresholds. There were a number of other measures introduced in the budget that are aimed to help people return to work and to help with the cost of living.
The energy price guarantee is to remain at the current level of £2,500 until 30 June saving a typical household around £160.
Child care Support
Another measure aimed to encourage people back into the workplace is the introduction of improved childcare support. Free childcare is being expanded to cover all children under 5 years old but this will not be achieved until September 2025. The changes will not start until April 2024 when parents of two year olds will get 15 hours of free care and then children from 9 months getting 15 hours free childcare from September 2024 and finally 30 hours of free care for all under fives from September 2025.
The big issue with this is for many it is too little to late and in addition there needs to be significant investment in the child care sector to create all the places that will be required to achieve this. There are some proposals to support the development of additional care resources but little detail as to how this will be achieved currently.
Mental Health Support
The Government is to provide £400m as a support package to improve mental health and musculoskeletal (MSK) resources for workers. Digital resources such as apps to help in the management of mental health and MSK conditions will be made readily available. It is intended that a new programme to be called Work Well will be piloted to improve the integration of employment and health support for those with health conditions, with the aim of supporting individuals into employment and to remain in work.
There will be 12 new investment zones in the West and East Midlands, Greater Manchester, the North East, West and South Yorkshire and Liverpool and one also in each of Scotland Wales and Northern Ireland as part of the levelling up initiative.
Annual Investment allowance
This allowance for small businesses is being increased to £1m, allowing 90% of businesses to deduct the full value of their investment from each years taxable profit.
Tax avoidance crackdown
There is to be a consultation on a new criminal offence for promoters of tax avoidance schemes and the doubling of the maximum sentences for tax fraud.
It is now anticipated that the UK will avoid a technical recession although it is still expected that the size of the UK economy will fall by 0.2% in 2023. The forecast for the following years has been cut to 1.3% for 2024, 2.5% for 2025 and 2.1% in 2026. In addition, it is now anticipated that inflation will fall to 2.9% by the end of 2023. However, it is clear that life will remain tough for many.
With all the changes for those who do have funds available to save, then a review of current planning should be undertaken to consider the implications of all these changes and see if amendments should be made.