Budget 2023 Archives - Financial Planning in Surrey

THE SPRING BUDGET 2023

Dominic Thomas
March 2023 • 10 min read

Pension reforms of sorts…

If you are under 75 and have a pension, today is a better day than yesterday. You may breathe a sigh of relief; the Chancellor has done something to directly benefit you. As with all Chancellors, there is of course some politics at play. Whatever your view of the rabble at the House of Commons, we finally have a Chancellor who seems to both understand maths and has an ability for some long-term thinking as well as valuing the concept of financial independence in his Spring Budget 2023.

As a reminder, it was the Blair Government who introduced the Finance Act 2004 which ushered in new pension rules from April 6th 2006 known as A-Day and termed “Pension Simplification”. The basic premise was to simplify pension funding, enabling anyone to make payments and get tax relief, restricted by a maximum annual contribution allowance and a lifetime allowance for the value of your pensions, be they final salary or investment based. It sounded so simple, something akin to the battery level on your mobile phone.

Next month, “pension simplification” turns 18 years old. Simple is certainly not a term that anyone would consider in the same breath as pension rules. A veritable smorgasbord of metrics are needed to monitor if you fall foul of the rules.

A-DAY TURNS ADULT

Today though, Mr Hunt has abolished the Lifetime Allowance, a welcome and grown up but unexpected move (it had been hinted that it would return to the level at which the Conservative Government inherited it at £1.8m. No, it’s abolished, completely! The Lifetime Allowance, which is something everyone had to assess pension benefits against will be gone from 6th April 2023. Do not retire before then – or more accurately do not crystallise any pension until then.

ANNUAL ALLOWANCE – UP BUT STILL TAPERED

He has not however returned the Annual Allowance to the 2010 level of £255,000 but has increased it from £40,000 to £60,000. In addition, the Tapered Annual Allowance has not been scrapped, but increased from £240,000 to £260,000 from 6 April 2023. The threshold test at income of £200,000 has not been altered. In theory therefore the new standard annual allowance of £60,000 will still reduce by £0.50 for each £1 over £260,000 but stopped at £360,000 when you will get the minimum maximum annual allowance of £10,000.

By way of example, someone with income of £300,000 would be £40,000 over the £260,000 threshold and thus see the annual allowance reduce from £60,000 to £40,000.

Those of you that have taken income from a personal pension (not a defined benefit/final salary pension) will be able to continue towards a pension under the Money Purchase Annual Allowance (MPAA) which is being increased from £4,000 back to £10,000. I understand this will double up as the minimum maximum (if you see what I mean) that anyone with income over £360,000 can also contribute (gross).

NEGATIVE TURNS POSITIVE

Medics (and a few others) that on occasion have a negative pension value for the year will now be able to offset this, something that was not possible previously.

25% TAX FREE CASH IS GOING FOR BIG PENSION POTS

There is a slight “fly in the ointment”. Under pension rules tax free cash is capped at 25% of the fund value, buried in page 100 of the Budget is the statement that advisers understand but most investors do not. “The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen thereafter”. In other words, the tax free cash lump sum (PCLS) link is to be broken. 25% of the current lifetime allowance is £268,275 and this is therefore being retained, meaning that whether your pension fund is more than this, you cannot withdraw more than £268,275 as a tax free lump sum. In plain a pension fund of £2m does not produce tax free cash of £500,000 (25%) but £268,275.

One other “minor” point is that those with Primary, Enhanced, Fixed or even Individual Protection from 2006, 2012 (max £450,000), 2014 (max £375,000) and 2016 (max £312,500). Therefore some people will have a higher tax free cash entitlement than the new limit of £268,275).

ISAs, JISAs, VCTs, EIS, SEIS

All as previously.

INCOME TAX, CORPORATION TAX, CAPITAL GAINS TAX, INHERITANCE TAX

As previously announced for 2023/24.

On occasion, Budget plans get revised (remember the glove puppet of a PM?) so there is a possibility that after a little more thought, pressure and checking, some of the points in the Budget might need a tweak, but in general this is a rarity.

If you have questions, that I have the realistic possibility of answering (not “where is Cloddach Bridge?” which gets a sum for refurbishment…. which I imagine is one of those times we may remark, “what, a million pounds?” (actually £1.5m) is either a lot or a little, that old price and value thing… much like the criticism that will inevitably be made of the abolition of the lifetime allowance, which is, from my perspective of working with you, a very good thing indeed.

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The November budget

The problem of having a deadline for publication is that life tends to throw up some new important information just at the wrong time. The chaos of the ‘mini-budget’ resulted in a new Prime Minister and Chancellor. The Budget on 17^th November was set to herald tax rises. So, what has been announced?

NOVEMBER – INCOME TAX

Tax thresholds have been frozen, save the additional rate of tax threshold, which now begins sooner, meaning that more people will pay 45% tax, starting at £125,140 instead of £150,000. What this means in practice for someone now brought into additional rate (earning £150,000) is that they pay 5% more income tax on their earnings above £125,140. If you earn £150,000 you would pay £1,243 more income tax as a result of this change, (£11,187 as opposed to £9,944) effectively £103.58 a month more. Whilst politicians talk of short-term pain, the projections show this measure for 5 years.

NOVEMBER – CAPITAL GAINS TAX

Capital Gains allowances have been cut substantially, reducing from £12,500 to £6,000 from April 2023 and then to £3,000 from April 2024. Trusts have a CGT allowance of half the personal allowance. So realising gains this tax year will be more effective than in future years.

As a reminder, this is the permitted gains on assets being sold with a 0% tax rate before being taxed at 10% or 20%, unless that asset is a second property in which case its 18% or 28%. So if you are a landlord, sell before April 5^th to maximise your allowances.

I had expected the rates of tax to increase in line with income taxes rather than the allowance being altered and mostly scrapped entirely. In any event, capital gains tax allowance reductions makes your annual ISA, Pension, VCT, EIS allowances all even more attractive, sheltering funds from CGT in different ways.

NOVEMBER- DIVIDENDS

The Dividend allowance has also been slashed. This will mostly impact those with a small business whereby family members or staff can have a share of profits (dividends) tax free. The first £2,000 of dividends are currently tax free, this will reduce to £1,000 from the new tax year and then £500 in the next ..

NOVEMBER – PENSIONS

It would seem that there are no changes, which is frankly a bit of a surprise. The annual allowance remains at £40,000 unless you have income over £200,000 when a reduced (tapered) allowance would apply. The Lifetime Allowance has remained in place. If you are an NHS employee, I cannot find anything in the 70 page statement to help you with your annual allowance problems and there is nothing about the tapered annual allowance. So, sadly, more senior doctors will likely reduce their NHS hours or otherwise face tax charges on income that they have not had. We can help crunch the numbers, but if anyone is in a position to ‘get it’, Mr Hunt is but seems to have chosen not to.

NOVEMBER – STATE PENSIONS

If you are receiving your State Pension, it’s going to increase by 10% in April. If you haven’t started taking yours, well you are also likely to have to wait until you are much older to get one. Everyone knows this is a political ‘hot potato’ and the younger generations are unlikely to receive a State Pension until at least 68 (and this will probably be increased in the announcement in early 2023).

NOVEMBER – FEELING FROZEN?

You are going to need to ‘let it go’ … that is – hopes of seeing the end of frozen allowances ending any time soon. The personal allowance, slice of basic rate and higher rate tax tiers were all frozen anyway, but the deep freeze has been extended by two further years. Due to inflation and rising salaries, this will in itself raise more tax. This is part of what critics call ‘stealth taxes’ – the sort you don’t really register (much like inflation eroding your cash) – you only tend to notice after a few years of going backwards.

The Energy Price Guarantee will be maintained through the Winter, limiting typical energy bills to £2,500, this will increase to £3,000 from April. It is generally expected that energy prices will remain high for the next 12 months. To be blunt, nobody knows because it all rather depends on the Russians. One point to note is that the energy savings you may be making now will likely continue as the Government intend to reduce energy consumption by 15% by the end of the decade. To put that into perspective, that’s about the same as making your use of energy in 10 months last a year.

PROPERTY

The British obsession with houses continues to be supported by Government policy. The tax when buying property (Stamp Duty Land Tax) was reduced in September doubling the first tier of SDLT with a 0% tax rate from £125,000 to £250,000. For First Time Buyers this is extended from £300,000 to £425,000. These measures will end on 31^st March 2025. If you are going to move or buy your first home and want to benefit from this fully, do so before March 2025.

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk

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