Spring Budget insights
The Spring Budget has been announced. Understand more about the scrapped pensions lifetime allowance, the capped tax-free lump sum and why most people still face a painful tax squeeze.
Published on 15 Mar 20235 minute read
Written by Jason Hollands
The Chancellor pulled a major rabbit out of his hat today when he scrapped the pensions lifetime allowance, rather than raising it as had been widely briefed.
This move along with the increased pensions annual allowance from £40,000 to £60,000 is hugely welcome news for those who have been deterred from retirement saving by the steep reductions in these allowances over time.
The Government also confirmed the following:
- The Money Purchase Annual Allowance – the amount that someone can continue to contribute to a pension once benefits have been taken – will increase from £4,000 to £10,000
- The adjusted threshold for the Tapered Annual Allowance will increase from £240,000 to £260,000 from 6 April
- The minimum Tapered Annual Allowance for the very highest earners will increase from £4,000 to £10,000
But there’s a sting in the tail…
Buried in the Budget notes is the maximum Pension Commencement Lump Sum for those without protections – known as the tax-free lump sum. This will be kept at its current level of £268,275, equivalent to 25% of the current lifetime allowance, and frozen thereafter.
Some will criticise these changes as ‘tax perks for the wealthy’ but scrapping the lifetime allowance and raising the annual allowance has in large part been driven by some unusual consequences.
Pension tax charges arising from the existing thresholds have caused problems for the NHS. They're influencing early retirement by doctors and deterring surgeons from taking on additional work. This exacerbated bulging waiting lists that built up during the pandemic.
Thousands could abandon fixed protection
The scrapping of the lifetime allowance means that those who halted pension savings – for example because they took out fixed protection to preserve access to earlier lifetime allowances of £1.25 million or £1.5 million – are now able to recommence pension contributions, at a time when more of their earnings are likely to be subject to the higher rates of tax.
But in doing so they need to carefully consider whether this will mean foregoing access to a larger tax-free lump sum.
Let’s say you haven’t contributed to your pension for several years. And let's imagine your adjusted earnings are below the level at which the tapered pension allowance regime kicks in. You could potentially contribute up to £180,000 in pensions next year.
This could be achieved by using the new, larger £60,000 gross annual allowance and then mopping up unused allowances of £40,000 for each of the previous three years under pensions ‘carry forward’ rules.
This is an opportunity for some savers to provide a massive boost to their retirement pots, and to take shelter from higher taxes.
Most people are staring down the barrel at a higher tax burden
But despite these very welcome developments in pensions for some, we cannot escape the reality that most people are staring down the barrel of a higher tax burden.
This tax-year is already forecast to see a record 6.1 million people paying tax at the higher and additional rates of 40% and 45% respectively, a shocking 15.3% increase on the previous year because of the powerful fiscal drag effect from frozen thresholds.
The Spring Budget revealed:
- No backtracking on the multi-year freeze in thresholds announced in the Chancellor’s Autumn Statement
- The planned reduction in the threshold at which the 45% band starts – from £150,000 currently to £125,140 from 6 April – will still go-ahead
- Against that backdrop and with UK pay – including bonuses – growing at an average of 5.7%, those being drawn into higher tax brackets look set to skyrocket further at a time when people are already feeling the squeeze from rising prices and higher borrowing costs
A Viking-like tax raid on shareholders
The Chancellor’s Viking-like tax raid on shareholders announced in the Autumn Statement is also looming despite better economic forecasts from the Office of Budget Responsibility.
The dividend tax allowance is set to be halved in the new tax year from £2,000 to £1,000, and then savaged again in April 2024 to a meagre £500.
Given the dividend allowance was £5,000 as recently as 2017/18, the amount people can receive tax-free in dividends outside of ISAs (Individual Savings Accounts) and pensions is being obliterated.
The amount that investors can realise tax-free from crystallised gains after the sale of assets is also set to be aggressively cut back within weeks, with the annual capital gains tax allowance reduced from £12,300 this tax year, to £6,000 in 2023/4 – and then halved again from April 2024 to just £3,000.
The most important tax-year end in living memory
So, despite some fantastic news for those with larger pension pots today, the tax outlook remains bleak for most people, underlining the importance of making the most of available allowances while you can.
This includes topping up pensions to benefit from income tax relief, crystallising gains while the bigger exemption is available and migrating investments held in a taxable environment into ISAs, if possible, to shelter future returns from tax. Married couples can also transfer assets to whichever spouse might have spare allowances that can be used or who is subject to lower rates of tax.
For some, more esoteric tax efficient but higher risk schemes, like Venture Capital Trusts and Enterprise Investment Schemes, which the Government has encouragingly reaffirmed its commitment to, may be worth considering.
In my view this is one of the most important tax-year ends in living memory given impending changes – but there is now only a short amount of time for people to act and the clock is ticking.
How Bestinvest can help you act before tax year end
Want an expert’s perspective on what the Spring Budget means for you and your money? Perfect – you can book a free coaching session with one of our financial planners.
No strings, no obligations, just straightforward expert insight to help you make the most of your money before tax year ends.
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