2023 March Budget – Key Announcements
Jeremy Hunt announced several positive changes in his March budget, particularly in relation to pensions. In this summary, we highlight some of the key points and areas to review in the new 23/24 tax year.
Lifetime Allowance (LTA)
The LTA charge is something that impacts those with pension funds worth more than £1,073,100. Individuals can suffer a tax charge of 55% on the excess over £1,073,100.
The chancellor said the LTA charge will be removed from April 2023 and the LTA will be abolished entirely from April 2024. This is a major change and will incentivise people to save into pension – and to work for longer.
The annual allowance for pension contributions will increase from £40,000 to £60,000 from the 23/24 tax year.
Again, this is a welcome development which will allow individuals to increase pension funding for retirement. For personal contributions, the most you can contribute (and enjoy tax relief) remains restricted to your relevant earnings in that tax year. Note that dividends and rental income do not count as relevant earnings here.
For those with higher earnings, the annual allowance is reduced/tapered. Currently, the allowance reduces where adjusted income exceeds £240,000. That threshold will increase to £260,000. (Adjusted income includes employer pension contributions, salary, interest, dividends and most other sources of income.)
The fully reduced annual allowance for higher earners has been £4,000. From 6 April 23, that allowance will increase to £10,000. High earners are still severely restricted in what they can get into a pension but this is a positive change that will help them to get a little more into this tax efficient wrapper.
Once you start drawing an income from a pension fund, your annual allowance is reduced. This is known as the money purchase annual allowance (MPAA). The MPAA will also increase from £4,000 to £10,000 from April 2023.
You can continue to carry forward unused annual allowances from the three previous tax years. The annual allowances and tapering thresholds from previous years still apply and have not changed i.e. the standard annual allowance for those years remains at £40,000. The £60,000 allowance only comes into effect from the 23/24 tax year.
Pension Commencement Lump Sum (PCLS)
Currently, most individuals who do not exceed the lifetime allowance can take up to 25% of their pension funds as a lump sum that is tax free. This is known as a Pension Commencement Lump Sum (PCLS). Where capital has come from occupational workplace schemes, some will have a protected PCLS more than 25%. For most though, the maximum has been 25% of their pension pot.
Going forward, the maximum PCLS (for those without protections) will be set at £268,275 and frozen at that level. This £268,275 figure is 25% of the current LTA of £1,073,100. At a simple level, those with pension funds under £1,073,100 will see no change – they can still take up to 25% of their pot as a PCLS. Savers with higher pension funds, may see their maximum PCLS fall below 25%.
These announcements in relation to pensions have increased the overall amount that people can put into their pension. By scrapping the lifetime allowance and increasing the annual allowance, Mr Hunt wants to encourage highly-skilled people, most notably senior NHS professionals, to remain in the labour market rather than retire early.
There were no changes to the ISA allowance. You can still put up to £20,000 into an ISA each year. For couples, that’s £20,000 each so £40,000 combined.
You do not pay any income tax (on interest or dividends) or capital gains tax (on realised profits) so Stocks & Shares ISAs remain a great way to invest tax efficiently. There is no cap on how much you can build up in ISAs – the only restriction is the £20,000 annual limit.
Inheritance Tax (IHT)
There were no changes to IHT in the budget. With the changes on pensions though, it is worth remembering that your pension fund does not form part of your estate on death and is therefore not subject to IHT. You can pass on your pension fund to loved ones on death. In many ways, you can regard your pension pot as a family trust fund that can be passed down the generations. On death before 75, the entire fund can be passed on tax free. On death after 75, it can be passed on with no tax on death and your loved ones will simply pay tax when they take money out – any withdrawals being taxed at their own rate of income tax.
Capital Gains Tax (CGT)
There were no changes to capital gains tax rates in the budget, but the changes announced in Autumn are progressing. The annual exemption for individuals is reducing i.e. the amount of gain you can realise in a tax year without paying CGT. It will fall from £12,300 in 22/23, to £6,000 in 23/24 and then just £3,000 in 24/25. Trusts will face even lower exemptions.
Similarly, we will see the previously announced reductions in the dividend tax allowance take effect. The allowance will reduce from £2,000 in 22/23, to £1,000 in 23/24 and then £500 in 24/25. Those with investments held outside of ISA will be impacted by this with more and more suffering tax on dividends. The tax on dividends applies irrespective of whether dividends are paid out to you or reinvested. The rate of tax on dividends remains the same for those with dividends in excess of the allowance: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
These changes on CGT and dividend allowances will increase the tax take on investments held outside of an ISA wrapper. Using the annual ISA allowance of £20,000 will become even more beneficial.
Pensions and ISAs have typically been the foundational elements for those looking to invest and build their wealth tax efficiently. This latest budget further cements their position as the go to areas for those starting to invest. The changes on pensions increase the scope for people to save into pension and take advantage of the many tax breaks that pensions offer. The changes to personal taxes have also reinforced the benefits of filling ISA allowances each year.
For those bumping into the maximum on pension and ISA, there are various other tax efficient options that can be used for capital. The likes of Venture Capital Trusts (VCT), Enterprise Investment Schemes (EIS), offshore investment bonds etc. all offer various tax advantages – although some of these options also present greater investment risks that are not suitable for most clients.
If you have any questions about the changes and how they could impact your situation or retirement plans, let us know and we will be happy to discuss.
Your capital is at risk. The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation which is subject to change. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Tax Advice.
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