Spring Budget 2023

By Phil Boon

Pension savers received a huge boost in the 2023 Spring budget after the Chancellor announced some radical changes to the existing rules.

Chancellor Jeremy Hunt has scrapped the Lifetime Allowance, increased the Annual Allowance and reformed the Tapered and Money Purchase Annual Allowances. A summary of these changes and other taxation areas are covered below.

Lifetime Allowance (LTA) Abolished

The LTA will be abolished from April 2024.  However, withdrawals in excess of the LTA from 6th April 2023 will not suffer a charge – effectively the LTA rate will be set to 0%. This is to allow for the unravelling of the existing legislation with changes to be included in a subsequent Finance Bill.

This removes the cap on lifetime pension savings. It also presents the opportunity for further funding, even if the LTA had previously been fully used. It will save those who would have been over the LTA a tax charge on the excess of 25% to 55%. 

There will still be a cap on tax free cash at 25%, up to a maximum of £268,275 (25% of the current LTA). Anyone with existing LTA protection will retain their entitlement to tax-free cash over £268,275.  Anyone with existing protection will also be able to restart pension funding from 6th April 2023, without losing their existing protection.

Annual Allowance (AA) Changes

Tax relief on Pension Contributions – An increase in the AA from £40,000 to £60,000 from 6th April.

This presents an opportunity to make a larger contribution, with extra tax relief of £8,000 for higher rate taxpayers and £9,000 for additional rate taxpayers.

Tapered AA – The minimum tapered AA will increase from £4,000 to £10,000 from 6th April.

This allows high earners with income over £260,000 to pay more into their pensions. 

The Money Purchase Annual Allowance (MPPA) will increase from £4,000 to £10,000 from 6th April.

This means those who have already started to draw income from their pensions can contribute more if they return to work.

State Pensions

It had already been announced prior to the Spring Budget that the triple lock on the State Pension would be maintained.  This guarantees the 10.1% CPI-based increase for next April, along with the same level of increase to Pension Credit.

In addition, there has been an ongoing review of State Pension age and if the current timetable for changes remains appropriate. The Government are due to publish their response by May 2023.

Rates, Tax Bands and Allowances for 2023/24

There were no further changes to those announced last November which were as follows:

Income Tax – Will remain at the basic, higher and additional rates of 20%, 40% and 45%, respectively.

Allowances and Thresholds – The point at which additional rate tax becomes payable will be cut from £150,000 to £125,140 from 6th April 2023.

This means those already paying tax at 45% will pay an extra £1,243 in 2023/24. The Government forecast that approximately 250,000 individuals will pay some extra tax due to this measure.

The personal allowance and basic rate band will be £12,570 and £37,700 respectively, remaining frozen until April 2028.

This means the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance.

Dividends – The dividend tax rates for basic rate, higher rate and additional rate taxpayers will remain at 8.75%, 33.75% and 39.35% for 2023/24.

The dividend allowance is to be halved from £2,000 to £1,000 for 2023/24 and halved again to £500 for 2024/25.

This means that many more investors will need to complete tax returns if their dividend income exceeds £1,000 next year. 

National Insurance (NI) – Thresholds will be fixed at the current 2022/23 levels. The changes to the thresholds at which individuals (both employed and self-employed) start to pay NI, introduced in July 2022, will remain – i.e., kept in line with the annual personal allowance of £12,570.

Capital Gains Tax (CGT) – The rates of CGT will continue at 10% for gains falling in the basic rate band when added to income, and 20% for gains exceeding the higher rate threshold (18% and 28% respectively for gains on residential property).

The CGT annual exemption will be cut from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024.

This means that based on 2021/22 figures, an estimated extra 235,000 individuals will need to file a self-assessment return in 2023/24.

Inheritance tax – The nil rate band (NRB) and residence nil rate band (RNRB) will remain at £325,000 and £175,000 respectively until April 2028.

Corporation tax – Will increase to 25% from 6th April 2023. However, small companies with profits below £50,000 will continue to pay at the current rate of 19%. There will also be a reintroduction of tapering relief for businesses with profits between £50,000 and £250,000 so that they pay less than the main rate.

Savings

ISAs – The adult ISA annual subscription limit for 2023/24 will remain unchanged at £20,000.

The junior ISA annual subscription limit for 2023/24 will remain unchanged at £9,000.

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