The Budget statement was clearly focused on the economically inactive and included a series of measures designed to aid individuals back to work. The proposed changes to childcare provision have captured most of the headlines; however, there were also significant changes to pension rules which will affect many individuals, and a tax reduction for business capital expenditure.
Perhaps the most surprising measure announced was the abolition of the Lifetime Allowance (LTA) tax charge from 6th April 2023. The LTA caps the amount an individual can hold in their pension without paying a tax charge. Individuals who breach the LTA – which was as high as £1.8m in 2010 but stands at £1.073m today – currently pay a 25% tax rate on income withdrawals above the LTA limit, with lump sums in excess of the LTA being taxed at 55%. This charge will be removed from 6th April 2023 and the LTA will be abolished altogether from 6th April 2024.
Following concerns that senior professionals are being forced into early retirement for fear of being subject to increased taxation on further pension accrual, press speculation had suggested the LTA would increase to £1.5m or £1.8m; however, the announcement that the LTA is to be abolished entirely is something of a surprise and opens a wide range of financial planning opportunities for those where the value of their pensions exceed – or are expected to exceed – the LTA.
The maximum amount of Tax Free Cash an individual can draw represents 25% of the current LTA, which is a maximum of £268,275. Despite the abolition of the LTA, the maximum amount of Tax-Free Cash available will remain capped at the current level. Those who hold existing Lifetime Allowance protections will still be entitled to the higher amount by reference to the specific protection held.
The amount an individual can save into a pension each year, and receive Tax Relief, has increased from £40,000 to £60,000 (or 100% of earnings if lower) with effect from 6th April 2023. This is a very helpful increase for higher earners, for members of a Defined Benefit scheme, or for those who wish to fund large lump sum contributions. The ability to Carry Forward any unused Annual Allowance has been maintained and coupled with the abolition of the Lifetime Allowance, further increases the attractiveness of pensions as a long-term savings vehicle.
Whilst the Annual Allowance has been increased from the start of the Tax Year, higher earners will still be subject to a Tapered Annual Allowance. The threshold income level, at which the Annual Allowance starts to taper, has been increased from £240,000 to £260,000, and the minimum Tapered Annual Allowance has increased from £4,000 to £10,000. Whilst this is still restrictive, the rules have been relaxed slightly to provide more scope for those with earnings that exceed the threshold income to fund contributions without being subject to a Tax charge.
In a move to encourage those who have already accessed their pensions to return to the workforce, the Money Purchase Annual Allowance (MPAA) has been increased from £4,000 to £10,000. Anyone who flexibly accesses a pension is subject to the MPAA in the future and whilst the restriction remains, the more generous allowance will allow those who have taken pension benefits in the past to make a meaningful level of contribution if they continue to work.
As usual, the Budget provided an update on the state of the UK economy. Forecasts from the Office for Budget Responsibility (OBR) now show that the UK is unlikely to enter a technical recession this year. Contrary to more pessimistic forecasts made last year by the Bank of England, the OBR indicated the economy will shrink by 0.2% this year before recovering. The OBR also forecasted UK Consumer Price Inflation would fall more sharply than anticipated, pencilling in a year end forecast at 2.9%, compared to the current rate of 10.1%.
Mr Hunt confirmed that the Individual Savings Account (ISA) and Junior ISA (JISA) allowances would remain unchanged for the forthcoming Tax Year at £20,000 and £9,000 respectively. The starting rate band for savings will also be maintained at £5,000. The Help to Save scheme, which provides a bonus on regular savings for those on a low income, will be extended for a further 18 months.
From 1 April 2023, investments made by companies in plant and machinery will qualify for a 100% first-year allowance for main rate assets. This exemption will last for 3 years and will mean UK companies will be able to write off the full cost in the year of investment.
As with all Budgets, the devil is in the detail; however, it is clear from the measures announced that Pensions have received their biggest shake-up since the introduction of the Pension Freedom rules in 2015. The abolition of the Lifetime Allowance and increase to the Annual Allowance now provide significant additional scope for tax-efficient planning, cementing the attractiveness of a pension as a planning tool.
Contact one of our experienced advisers here to discuss the impact of the changes on your pension savings and consider new opportunities as a result of the Budget.
Tax treatment varies according to individual circumstances and is subject to change. The Financial Conduct Authority does not regulate tax advice.
