On Wednesday 15 March, Chancellor Jeremy Hunt delivered the Government’s 2023 Spring Budget. Having been forced to intervene with a series of economic measures designed to stabilise the economy following the turbulence of the Mini Budget in September 2022, the Chancellor announced that this budget was one focussed on Growth.
Encouragingly, there were positive forecasts regarding the UK economy. According to the latest predictions by The Office for Budget Responsibility (OBR), the UK is now expected to avoid an economic recession and is predicted to grow every year to 2027. The OBR also predicts that inflation will fall to 2.9% by the end of 2023, which is welcome news.
Pension Lifetime Allowance (LTA) Abolished
This was a budget designed to boost the UK economy by helping people get back into, or stay in, employment. New funding was announced to help with the cost of childcare, and the Chancellor also unveiled generous pension tax changes to help lure over 50’s who took early retirement back into the labour market or tempt people to not retire early.
Jeremy Hunt announced that he would abolish the Pension Lifetime Allowance. Rather than just increase the threshold, the Chancellor has now removed the threshold completely. Currently, the amount of money workers can put into their pension before being taxed is £1.07m, but this will now be removed completely.
It has been reported that people had been retiring early to prevent tax penalties, particularly in the NHS, and this policy is designed to prevent that. Currently, the tax charge is 55% on amounts above the allowance. Commenting on the policy, the Chancellor said: “No one should be pushed out of the workforce for tax reasons.”
Other Pension Changes
The Chancellor announced several other changes to pensions, including:
- In response to the removal of the lifetime allowance the 25% tax free lump sum when accessing a pension will be capped at the current value of £268,275.
- The Money Purchase Annual Allowance (MPAA) has been increased from £4,000 to £10,000, giving greater flexibility to boost retirement savings. The MPAA is a rule that reduces the amount of money you can save in a pension plan each year if you’ve already started to take income from it. Essentially it limits the amount you can contribute to your pension each year after you’ve started to take money out.
- The Pensions Annual Allowance, the amount you can pay in each year without incurring additional taxes, has been increased from £40,000 to £60,000. However, this is still subject to a reduction for high earners. Now people earning over £260,000 will see this figure reduced. (Previously £240,000)
Corporation Tax
In addition to the pension changes, the controversial plans to raise corporation tax will go ahead. Despite business leaders saying the rise will hamper growth, the Chancellor said that Corporation Tax will rise from 19% to 25%, a change which is expected to pull in an extra £18bn per year for the Treasury.
The Chancellor did not announce any changes to the other main taxes that affect individuals. Income Tax, Dividends, Capital Gains Tax (CGT) and Inheritance Tax (IHT) all remain as announced in the Autumn 2022 budget.
Income Tax
Income tax rates for 2023/24 will remain at the basic, higher and additional rates of 20%, 40% and 45% respectively.
The changes to allowances and thresholds announced in the Autumn 2022 budget will take effect from 6 April 2023. The point at which additional rate tax becomes payable will be cut from £150,000 to £125,140. This means that those already paying tax at 45% will pay an extra £1,243 in 2023/2024.
The personal allowance and basic rate band remain frozen at £12,570 and £37,700 respectively until April 2028 (an additional two-year extension). This means that the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance.
Dividends
As announced in Autumn 2022, the dividend allowance will be halved £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 the 2023/24 tax year.
Capital Gains Tax (CGT)
There is no change to the rates of CGT, and these will continue to be 10% and 20% (18% and 28% respectively for gains on residential property). In terms of allowances, from April 2023 the annual exemption will be cut from £12,300 to £6,000 and then £3,000 from April 2024.
Inheritance tax (IHT)
The current IHT allowances – nil rate band (NRB) and residence nil rate band (RNRB) – will be frozen until April 2028. The NRB will remain at £325,000 and the RNRB at £175,000 until April 2028.
ISAs
In terms of ISAs, there were no changes, and the annual allowance remains at £20,000, the highest it has ever been. The Junior ISA yearly limit also remains at £9,000.
If you are approaching retirement and would like to discuss your options following the Budget, please get in touch.
