The spring Budget was a busy one from a personal finance perspective. Chancellor of the Exchequer, Jeremy Hunt, set out a variety of measures aimed at tempting people back into work to boost Britain's economy and some significant reforms of childcare, energy and fuel duty.
While there were no new tax cuts, continuing the prudent approach Mr Hunt has pursued since taking the helm last autumn, changes to pension limits caught the eye. They are squarely aimed at getting over-50s back into work in an effort to tackle economic inactivity, but will allow all investors greater scope to rebuild pension pots following significant rises in the cost of living and a dip in markets over 2022.
What does the spring Budget mean for you?
Cost of living
The Chancellor was given room for manoeuvre with bumper tax receipts providing a surprise £5.4bn surplus in January. Meanwhile, a warm winter kept a lid on the cost of energy subsidies. Facing calls to address the sharp fall in living standards driven by the recent surge in inflation, there was some attention to the challenges faced by households up and down the country with measures addressing energy bills and the cost of childcare.
The Energy Price Guarantee (EPG) that currently limits the average annual household bill to £2,500 had been set to rise to £3,000 in April, an unwelcome squeeze for many struggling households. However, the present level of the EPG is to be extended for three months, thereby giving households greater affordability and certainty – at least in the short term. Happily, falling wholesale gas prices could mean that the Energy Price Cap calculated by the regulator Ofgem sinks below the EPG and translates to a reduction in bills in the third quarter of this year – though this dependent on what happens in energy markets between now and then.
To relieve the immediate pressure on households and businesses further, Mr Hunt also extended a cut in fuel duty due to expire at the end of March, a welcome move for motorists and hauliers dealing with elevated prices at the pumps. The Chancellor also significantly expanded the scope of free childcare as part of the government's drive to get more people into work. The plan will see 30 hours of free childcare a week for working parents being expanded to cover children from the age of nine months to two years old, but will only be fully implemented by September 2025. At present, only parents with three and four-year-olds can get 30 hours of free childcare a week.
Mr Hunt stated that he wants a pensions system that encourages continued workforce participation and to remove barriers to people getting back into work. An important step towards that, and clearly with an eye on the disincentives for high earners and those with large final salary pensions, is the removal of the pension Lifetime Allowance (LTA).
The LTA is the limit on how much you can accumulate across all your pensions before facing a tax charge. It had been frozen at £1.073m until 2026, but it will now disappear altogether from 6th April 2023. This could mean some people close to, or over, the limit could be encouraged back into work, or into working for longer, as they could accrue further pension provision without being penalised when they take benefits. It is especially relevant for certain NHS professionals where the limit was an obstacle to a much-needed return to the workplace, but it applies to anyone that has built up significant pension provision and worries about overstepping the limit.
While this is a welcome move for pension planning, there is some devil in the detail in terms of a limit on the value of any pension lump sum. For those without previous pension protections, the maximum will be retained at £268,275, 25% of the current LTA. This essentially limits the tax free cash available to retirees, as opposed to the overall value of the pensions accumulated. With the rest of any pension taken as taxable income it means a progressively higher tax rate on larger pensions.
Meanwhile, the pension annual allowance, the maximum that can be paid into your pension each year including employer contributions, is to be increased from £40,000 (subject to sufficient earned income in a tax year) to £60,000 from April. For those whose earnings vary greatly from year to year this offers more scope to upsize contributions and better plan for retirement. Again this Budget change takes effect from 6 April 2023. Individuals contributing to a pension, including Self-Invested Personal Pensions, will continue to be able to carry forward unused annual allowances from the three previous tax years.
Importantly, the Chancellor also reformed the money purchase annual allowance (MPAA). This wrinkle in the pension rules reduces the standard annual allowance to £4,000 for those who have already flexibly accessed taxable income from a retirement pot such as a personal pension from age 55. It was a complexity that stood in the way of some retirees wishing to return to the workforce and significantly rebuild their pension pot and penalised those forced to draw on the pension early to cover unexpected costs or fill a gap in employment income. The MPAA will now be £10,000 from the 2023/24 tax year and this reform could help address a skills shortage that is hampering the UK economy. This is in keeping with the Chancellor’s more general policies to encourage retirees back into work, as well as assisting people who have no choice but to raid their pensions to stay afloat amid escalating food and energy price.
The tax treatment of pensions depends on individual circumstances and is subject to change in future.
There were no major changes to ISAs or to personal taxation, which wasn’t a great surprise given that short-term tax cuts could fuel inflation and are at odds with the Chancellor’s strategy of targeting debt reduction and suppressing rising prices. Given the absence of rabbits pulled from hats, investors will need to live with the changes unveiled at the Autumn Statement, which involved a freezing of major tax bands and thresholds, a reduction in the dividend allowance and smaller capital gains tax allowance as follows:
1. Income tax thresholds
Those hoping for some modest tax cuts were disappointed and Mr Hunt’s announcements in his November statement, when he revealed that income tax thresholds would be frozen for even longer until April 2028, still stand
This will pull more people into the income tax system for the first time, or into higher tax bands over the next six years as wages increase. In addition, from next tax year the 45 percent ‘additional rate’ threshold will be reduced from £150,000 to £125,140, dragging more people into the highest rate of tax.
This underscores the advantages of tax-efficient wrappers such as ISAs and pensions where income and investment gains aren't taxable. In particular, maximising pension contributions, where appropriate, looks more attractive than ever. For now, Mr Hunt has resisted the urge to tinker with the rate of tax relief.
2. Income tax on dividends
The tax-free allowance for share dividends is to be cut. The dividend allowance, which is on top of the income tax personal allowance, was reduced from £5,000 to £2,000 in 2017. It will now almost disappear altogether, falling to £1,000 next year and to £500 in 2024.
This means more people will end up paying tax on their dividends and have to fill in self-assessment tax returns each year. The tax rates on dividend income are unchanged, 8.75%, 33.75% and 39.35% for the basic, higher and additional rates respectively.
Dividends provide a regular income from investments and a way for self-employed individuals to pay themselves via their own company. It emphasises the need to use tax-efficient ISA accounts to house investments, not only to save tax but to reduce fiddly administration each year.
3. Capital gains tax
Capital gains tax (CGT) is paid on the profits from the disposal of assets. There is a CGT annual allowance, presently £12,300, on which an individual pays no tax. However, CGT is payable on profits over that - at 10% or 20% – plus an additional 8% if the gain is from residential property. From next April the allowance falls to £6,000 and then to £3,000 from April 2024.
Again, this reinforces the case for utilising ISAs and pensions as far as possible as gains within these are not taxable. It is also worth noting that married couples and those in civil partnerships can also transfer assets to each other to make use of two CGT allowances, or they can look to shift a potential gain to a partner who is in a lower tax band. Consideration of ‘harvesting’ capital gains in the current tax year could make sense for those with significant investments outside of tax-efficient wrappers.
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