Techzone

Pension savers received a huge boost today after the Chancellor announced that the lifetime allowance (LTA) on pensions savings will effectively be removed from April, meaning that there will be no LTA tax charge when clients come access their funds.

In our research last year, 39% of advisers said removing the LTA would be the most helpful tax and pension planning simplification for them and their clients. Today, they got their wish.

In addition, the annual allowance, the amount that can be paid in ‘tax free’, is set to increase from £40,000 to £60,000.

These measures are part of the Government’s growth plans to get more people back to work, including early retirees such as doctors who left for pensions tax reasons. The hope will be that it also incentivises others not to take early retirement in the first place.

Further measures include increases to the money purchase annual allowance (MPAA) and the minimum tapered annual allowance from £4,000 to £10,000.

As expected, there were no further changes to tax rates, bands, and allowances. These will be as announced in the Autumn Statement last November. This should allow advisers to plan with some certainty.

So what will the changes to the pensions allowances mean for clients from the start of the new tax year?

Lifetime allowance abolished

The LTA will be abolished from April 2024, but withdrawals in excess of the LTA next year 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 essentially removes the cap on lifetime savings, opening up the opportunity for further funding, even if the LTA had previously been fully used.

There will, however, be a cap on tax free cash at 25% of savings subject a maximum of £268,275 (25% of current LTA).

While the various forms of LTA protection will be redundant with regards to the LTA charge, they may still be relevant for determining tax free cash. Subject to certain conditions, anyone with a tax free cash entitlement in excess of £268,275 because of their LTA protection will retain their rights to this higher amount. They will also be able to restart pension funding from 6 April 2023, without losing their existing protection. 

Those with scheme-specific tax free cash in excess of 25%, or with stand-alone lump sum rights, will also keep this entitlement.

Annual allowance changes

• Tax relief - An increase of £20,000 in the annual allowance presents an opportunity to make a larger contribution, with extra tax relief of up to £9,000 from April for additional rate taxpayers.
  
  This may be particularly attractive to those that will be paying additional rate tax on their income for the first time once the additional rate threshold drops from £150,000 to £125,140 in 2023/24.
• Tapered annual allowance - The minimum tapered annual allowance will increase from £4,000 to £10,000 from April. This is accompanied by a rise in the adjusted income threshold to £260,000. However, the threshold income figure is to remain at £200,000. This will take more people out of the reaches of tapering, and those who do exceed will still be able to contribute more. Additional rate taxpayers subject to the minimum will still benefit from a tax saving of £2,700.
• Money purchase annual allowance - The increase in the MPAA from £4,000 to £10,000 will mean that those who have already started to draw income from their pensions and left the workplace altogether or even on a part-time basis may be encouraged to return to work full-time without being penalised for being a member of the workplace pension scheme.
• Public service schemes - The various schemes for each public service workforce will be considered as one for the purposes of calculating annual allowance input amounts. This will allow members to offset any negative input amounts in an arrangement against positive input amounts in others. This may be particularly useful in 2023/24 when opening values will be uprated by CPI of 10.1%. Legislation will be introduced later in the year.
• Personal income tax allowance - Personal allowance will be reinstated if adjusted net income falls below the £100,000 income limit. This means that personal allowance would be within reach of a client with income of £160,000 contributing the full £60,000 annual allowance - possibly more if they have any unused carry forward allowance.
• Child benefit - The child benefit tax charge will not apply if net income falls below £50,000 for the highest earner in a household. Again, the ability to pay up to £60,000 into a pension could mean this is more achievable.

State Pensions

The following measures were announced prior to today’s Budget:

• The triple lock on the State Pension is maintained, guaranteeing the 10.1% CPI-based increase for next April along with the same level of increase to the Pension Credit.
• There has been an ongoing review of State Pension age and whether the current timetable for changes is still appropriate. The Government have said they will publish their response by May this year.

Rates, tax bands and allowances for 2023/24

There were no further changes to those announced last November. To summarise, the key points for the 2023/24 tax year are:

Income tax

• Rates - Income tax rates for 2023/24 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 6 April 2023. This will mean that 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 and are to remain frozen until April 2028. This means that the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance.
• Dividends - The dividend allowance is to be halved from £2,000 to £1,000 for 2023/24, and halved again to £500 for 2024/25. Consequently, many more investors will need to complete tax returns if their dividend income exceeds £1,000 next year. 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 rates and bands for Scotland in 2023/24 are:
  
  

  Top rate	£125,141 and up	47%
  	Bands of taxable income	Rate
  Starter rate	£1 to £2,161	19%
  Basic rate	£2,162 to £13,118	20%
  Intermediate rate	£13,119 to £31,092	21%
  Higher rate	£31,093 to £125,140	42%

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. they're kept in line with the annual personal allowance of £12,570.

Capital Gains Tax

• The CGT annual exemption will be cut from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024. Consequently, based on 2021/22 figures, an estimated extra 235,000 individuals will need to file a self-assessment return in 2023/24.
• 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).

Inheritance tax

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

Corporation tax

• Corporation tax will rise to 25% from 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.