Spring Budget 2023: What are the Tax and Pension Changes?
Spring Budget 2023: What are the Tax and Pension Changes?
Following the Spring Budget given by Jeremy Hunt earlier this month, there are a number of significant changes around pensions and taxation more broadly which come into effect on 6th April 2023.
We have summarised the key changes below:
Pension Allowances
In his Spring budget 2023 statement, Jeremy Hunt set out his plans to get the UK economy back on track and get inflation under control. He made it clear that the focus of his announcement was economic growth, and a big part of his growth plan was to get people back to work, including early retirees. As a result, he made some major changes to pension allowances.
Pension annual allowance.
The pension annual allowance is the total amount you can save into your pension plans each year before you have to pay an additional tax charge. This includes payments from you, your employer and any third party. The allowance was the lower of £40,000 or your total relevant earnings, which will be increasing to £60,000 on 6 April.
Money purchase annual allowance.
If you access any taxable money from your pension plan - either through a drawdown arrangement or from cashing in your pension savings - then you may see your annual allowance reduce. The amount you can save into your plan will usually reduce from £40,000 to £4,000. This is known as the money purchase annual allowance.
From 6 April, this will increase from £4,000 to £10,000, making it easier for you to keep working and saving once you’ve taken money from your savings if you want to.
Tapered annual allowance for high earners.
The tapered annual allowance gradually reduces the amount you can save into your pension plan each tax year depending on your earnings. Your allowance would not reduce to any lower than £4,000. This lower limit will be increased to £10,000 in the new tax year. The adjusted income level required for the tapered annual allowance to apply to will also increase from £240,000 to £260,000.
Lifetime allowance.
The lifetime allowance (LTA) is the total amount you can build up in all your pension savings in your lifetime without facing a tax charge when you come to take them. If your pension savings are worth more, you would need to pay a tax charge on anything over the allowance – also known as the ‘excess’.
The LTA is currently £1,073,100 and we were told previously that it would remain at that level until 2028. However, in the Spring budget it was announced that the LTA tax charge, which is payable on the excess, will be removed from 6 April.
Additionally, at a future fiscal event, the government will make the necessary changes to entirely remove the LTA from pensions tax legislation. Consequently, this measure also removes the need for people to rely on protections from previous decreases to the LTA.
One detail that hasn’t changed, is that for most people, the amount you can take as your tax-free lump sum entitlement will stay at 25% of the previous lifetime allowance limit of £1,073,100 (i.e. £268,275). Those holding previously-granted LTA protection will retain the right to 25% of their protected amount. It looks likely that this will be frozen thereafter which means a gradual erosion in real terms. However, the good news is no-one will face a retrospective cut.
State Pensions
Increases in the State Pension.
The State Pension will rise by 10.1% from 6 April, as confirmed in the Autumn Statement. This will affect you whether you’re eligible for the new flat-rate State Pension, which was introduced in April 2016, or the older basic State Pension.
From 6th April, those qualifying for a full new State Pension will receive £203.85 a week (up from £185.15). And those who reached State Pension age before April 2016, who are on the older basic State Pension, will now receive £156.20 – up from £141.85. You can check your own State Pension forecast on the government’s website.
An increase in the State Pension age.
The State Pension age is due to increase over the next 25 years. A review of the State Pension age is currently being carried out which will decide if this timescale is still appropriate. The Secretary of State for Work and Pensions is due to publish the government’s review of the State Pension age in early 2023. The review will need to carefully balance important factors including economic sustainability and context, the latest life expectancy data and fairness to both pensioners and taxpayers.
The deadline for State Pension top-ups closes in July.
The government scheme which allows people to fill historical gaps in their National Insurance (NI) record will come to an end on 31 July (this had previously been 5 April). Under normal rules it is only possible to fill gaps in NI records up to six years after the year in question. After that point, the year becomes a permanent gap in an NI record. It could affect the ability for someone to build up a full state pension.
This means that 2016/17 would normally be the oldest year which could be filled in 2022/23. However, for a limited period, people are able to go much further back and fill gaps for any year from 2006/07 onwards. This extra 10-year window will close on 31 July 2023. This concession applies only to those who come under the new state pension system; that is, those who reached (or will reach) state pension age after 5 April 2016.
Topping up is not the right answer for everyone, but in some instances it can be very valuable. The current cost of voluntary Class 3 NI contributions is £15.85 per week or £824.20 per year. This one-off lump sum payment can add up to 1/35th of the full rate to an eventual state pension. As the state pension is currently £185.15 per week, this boost is worth £5.29 per week or around £275 per year. Someone who gets this boost for at least four years will recover their initial outlay (net of basic rate tax) and everything beyond that would be profit.
However, anyone thinking of topping up their state pension for these earlier years must check with the Future Pension Centre at the DWP before making such contributions. This is because there are some situations in which paying historical contributions would not boost a state pension. This could be particularly true for those who are short of a full state pension because of extensive periods of ‘contracting out’.
Income Tax Allowances
There were three main changes to income tax:
The standard Personal Allowance (how much you can earn before paying income tax) is £12,570 for the 2022-23 tax year. It will be frozen at this level until April 2028.
The thresholds for the basic rate (20%) and higher rate (40%) bands have also been frozen until 2028. You can find more detail on current income tax rates and bands at gov.uk. Note that tax bands and rates are different in Scotland.
The additional-rate tax (45%) bracket will reduce from £150,000 to £125,140 from April 2023.
ISA Allowances
The ISA allowance in 2022-23 will stay at £20,000. That means you can save up to £20,000 in a Cash or Stocks & Shares ISA, or a combination of both. The Junior ISA (JISA) allowance stays at the current level too, which is £9,000.
Capital Gains Tax (CGT)
The amount you’re exempt from paying tax on is being reduced from £12,300 to £6,000 from 6 April 2023, and then to £3,000 from 6 April 2024.
In a far more positive move, fairer rules are being brought in from 6 April in respect of how CGT applies to spouses and civil partners who are in the process of separating. Under the current law, where spouses or civil partners separate, transfers of assets between spouses and civil partners who are living together are made on a “no gain/no loss” basis, but only in relation to any disposals in the remainder of the tax year in which the separation happens. After that, transfers are treated as normal disposals for capital gains tax purposes.
Legislation will be introduced from April 2023 that will provide that:
Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain/no loss transfers.
No gain/no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.
A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim private residence relief (PRR) when it is sold.
Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.
Dividends
The amount you’re exempt from paying tax on (the dividend allowance) is reducing from £2,000 to £1,000 from April 2023.
Inheritance Tax (IHT) Allowances
The limits on the nil rate band and residential rate band (RNRB) for inheritance tax have been frozen until April 2028:
Nil rate band: £325,000 for individuals / £650,000 for married couples/civil partners.
RNRB (where eligible): £175,000 for individuals / £350,000 for married couples/civil partners.
Tax on Businesses
From 6 April, the main rate of Corporation Tax will be 25% for companies with profits of £250,000 or more – this applies to all profits.
A Small Profits Rate of 19% will exist for companies with profits of £50,000 or less.
The main rate will taper in between £50,000 and £250,000.
On a more positive note, at the Spring budget Jeremy Hunt set out his vision to ensure that the UK’s tax system fosters the right conditions for enterprise by being one of the most competitive in the world.
To do this, the Chancellor transformed capital allowances to boost investment, increased support for R&D, and simplified the tax system for SMEs:
Full expensing - This lets taxpayers deduct 100% of the cost of certain plant and machinery from their profits before tax. It is effective from 1 April 2023 to 31 March 2026.
The 50% first-year allowance (FYA) - This lets taxpayers deduct 50% of the cost of other plant and machinery, known as special rate assets, from their profits during the year of purchase. This includes long life assets such as solar panels and thermal insulation on buildings.
Research & Development - A new R&D scheme for 20,000 SMEs. Eligible loss-making companies will be able to claim £27 from HMRC for every £100 of R&D investment, instead of £18.60 for non-R&D intensive loss makers.
Further details can be found on gov.uk.
Stamp Duty
The price threshold at which you pay stamp duty on residential property purchases has doubled from £125,000 to £250,000. This means that you won’t need to pay stamp duty on properties that are worth less than £250,000.
The stamp duty threshold for first-time buyers has increased from £300,000 to £425,000. And the maximum value of a property on which first-time buyers' relief can be claimed has also increased from £500,000 to £625,000.
These changes came into effect on 23 September 2022 and will remain in place until 31 March 2025. These changes only apply in England and Northern Ireland as property is taxed differently in Scotland and Wales.
How we can help.
If you would like to speak with us about any of the information contained within this communication, or if you would like to discuss the value of your pensions or investments or your mortgage needs, please get in touch with me by phone or email. Alternatively, you can arrange a free initial consultationwith a financial adviser below.
As with all investments, your capital is at risk. The value of investments and pensions, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results. Think carefully before securing debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it. Tax rules can change, and the benefits depend on individual circumstances. The information here is based on our understanding in March 2023.