UK March Budget 2023

The Budget was delivered on 15^th March by Jeremy Hunt. It included a number of small changes and a couple of major ones.

The biggest change was a significant relaxation of pension allowances, although rumours were circulating in the days before the announcement itself.

The cost of living and the NHS have been two of the public’s headline concerns since the last Budget, but measures in these areas were remarkably light.

The focus seems to be on growth and getting (and keeping) as many people as possible in work.

Below, we’ve summarised the key points that might affect you directly.

Pensions

The big news was the abolition of the Lifetime Allowance (LTA). To recap, the LTA is the total amount that individuals can accumulate in their pension savings before paying extra tax; this was previously frozen at £1,073,100 until April 2028.

There had been much speculation before the Budget that the LTA would be increased to £1,800,000. However, the Chancellor went even further by announcing that the LTA will be abolished completely from April 2024, with the LTA tax charge being removed from April 2023. This is certainly the biggest change to pension legislation since the introduction of pension freedoms in 2015 and probably the biggest change to pension taxation since the introduction of the LTA in 2006.

In addition, HMRC have confirmed that individuals who hold valid LTA Enhanced Protection or Fixed Protection, where this protection was applied for before budget day will, from 6^th April 2023 be able to save into pensions, join new arrangements or transfer without losing this protection.

This is obviously great news for those with larger pensions, both final salary or defined contribution (e.g. personal pensions) and those of you that had applied may be thinking that there is no point in keeping whatever form of LTA protection you hold. However, don’t do anything yet.

One important change wasn’t actually mentioned during the Budget but was instead released through the written statement: this concerns the amount that can be withdrawn from a pension free of income tax. Under the current rules the maximum tax-free cash available is normally the lower of:

• 25% of the value of the pension benefits being taken; or

• 25% of the individual’s remaining LTA.

There are however, some limited exceptions to this, where a member is entitled to a different tax -free cash amount through a form of LTA or specific tax-free cash protection.

From 6 April 2023, maximum tax-free cash payable will be capped at £268,275 which is 25% of the current standard LTA (£1,073,100). There has been intimation that this figure will be frozen, but for how long is not yet clear. For defined contribution pension plans, therefore, although tax-free cash will still be 25% of your total pension funds value it will be capped.

Those with a higher tax-free cash entitlement, whether through LTA protection or protection in a scheme, will retain their right to take a higher amount. As an example, someone with Fixed Protection 2016 will still be entitled to receive tax-free cash of up to £312,500 (25% of £1.25m). So, LTA protection still has significant value.

There is also good news for those still wishing to contribute to their pensions. The Annual Allowance (AA) will be increased by 50% from £40,000 to £60,000 per tax year from 6 April 2023, but tax relief will still only be available on contributions up to 100% of your relevant earnings.  

This will be particularly attractive to those who will be paying additional rate tax (or top rate in Scotland).

Individuals will continue to be able to carry forward unused AA from the three previous tax years.

There are also welcome changes for those in public sector pension schemes as the way that their benefits will be treated for AA purposes becomes more accommodating.

For those who have already accessed their pension plan flexibly, i.e. by taking taxable income from a flexi access drawdown plan, and then returned to work, the Money Purchase Annual Allowance (MPAA) will still apply. However, this will increase to £10,000 per tax year from April 2023, significantly up from the current £4,000 tax year allowance. This is welcome news and will help people replenish pension funds and save tax efficiently.

High earners will also benefit with the minimum amount of Tapered Annual Allowance (TAA) also increasing from £4,000 to £10,000 from 6 April 2023. This will be accompanied by a rise in the adjusted income threshold from £240,000 to £260,000. It is therefore assumed that individuals with both threshold income above £200,000 and adjusted income of £360,000 or more will have a tapered annual allowance of £10,000. However, we await the published detail before we can say with certainty how this will work.

One very important tax rule that remains unchanged is the treatment of pensions in the event of death. We are happy to confirm that pension funds remain outside the scope of inheritance tax and in the event of death prior to age 75 they are also free from income tax, therefore, will be paid out or transferred to your beneficiary entirely tax free.

Should death occur after the age of 75 the funds will be subject to income tax at your beneficiaries’ marginal rate of tax, but only when the funds are withdrawn from the pension wrapper.

Investments

The ISA allowances all remain the same with the adult ISA allowance at £20,000 and the Junior ISA allowance at £9,000 for the 2023/24 tax year.

Taxation - Income Tax

As previously announced most income tax thresholds will remain unchanged with the only exception being the dividend allowance which will be reduced from £2,000 per year to £1,000 per year from 6^th April 2023. See full table below:

The starting point for income tax bands will also remain unchanged for basic rate and higher rate of tax. However, the additional rate band will now start at £125,140 rather than £150,000 from 6^th April 2023. See full table below:

Taxation - Capital Gains Tax

The rates for capital gains tax have remained unchanged. However, the annual exemptions for both individuals and trustees have been reduced significantly. See full table below:

The changes to the LTA and AA in particular are great news, but we still need to wait for all of the rules to be published. The devil is, as they say, in the detail, so please do not take any action before speaking to your Financial Planner.

If you do not currently have a Financial Planner, please contact us and one of the team will be happy to help.