March 2023 Budget – Important Changes to Pensions and Tax Allowances
The Chancellor Jeremy Hunt used the recent March budget as an opportunity to increase pension allowances. This is primarily designed to encourage professionals to consider continuing to work into later life: professionals who would otherwise have been penalised, due to the previous limits. This presents additional planning opportunities for individuals and businesses with respect to both their own retirement planning and also intergenerational estate planning.
The changes came into effect on 6 April 2023 and are across the Annual Allowance, which increased from £40,000 to £60,000, the Money Purchase Annual Allowance, which increased from £4,000 to £10,000, and the abolishment of the Lifetime Allowance. Furthermore, the level of earnings which begin to have a tapering effect on tax-efficient pension savings increased from £240,000 to £260,000.
The abolishment of the Lifetime Allowance will come as welcome news to those who would have otherwise suffered a 25% tax charge on income or a 55% tax charge where their pension funds were accessed as a lump sum in excess of the previous allowance. It should be noted, however, that for most there will remain a cap on the level of Pension Commencement Lump Sum (Tax-Free Cash) of 25% of the current limit, which is £268,275. That is, unless you have previously protected your Lifetime Allowance.
The benefits of making pension contributions include tax relief at the individual’s marginal rate of Income Tax, the ability for the invested funds to grow free from both Income and Capital Gains Tax, and the favourable tax treatment of pensions from an estate planning perspective in that they immediately fall outside of the individual’s estate for Inheritance Tax (IHT).
The increase in the Money Purchase Annual Allowance will benefit retirees who have previously accessed taxable income from their pension and are now considering a return to the workforce. This is because these individuals would now have the opportunity to make an additional £6,000 in contributions while still retaining all of the tax benefits.
For individuals with Defined Benefit style pension arrangements (Final Salary), the proposed changes present the opportunity to re-evaluate their wider retirement planning. A particular group who are expected to benefit from the Lifetime Allowance changes are NHS employees who may have left their scheme due to the anticipated tax penalties.
Pensions remain a staple in many clients’ holistic plans and the aforementioned increases now provide scope for additional contributions, something which should be carefully considered.
In addition to the pension allowances outlined above, it’s also important to highlight the other taxation changes which will impact upon many individuals. From the new tax year on 6 April 2023, the annual exempt amount for Capital Gains Tax reduced from £12,300 to £6,000. This reduction will then be reduced further to £3,000 from the 2024/25 tax year.
It’s worth noting, however, that the Individual Savings Account (ISA) allowance is set to remain at £20,000. This means that individuals can still invest up to this amount and benefit from tax-free growth and withdrawals on their investments. Using this allowance is even more important now that the Capital Gains Allowance is reducing.
Finally, it’s important to highlight that Corporation Tax rates have increased from 19% to 25% for companies with profits exceeding £250,000. This increase is expected to impact many business owners’ tax planning along with overall profitability. Business owners may now wish to revisit their levels of pension contribution due to the potentially higher levels of Corporation Tax relief available along with the valuable National Insurance savings.
It is crucial to keep these changes in mind when planning for your own retirement and ensuring tax efficiency, along with establishing a robust intergenerational estate planning strategy. It is therefore vital that you speak with your financial adviser and understand how these changes are likely to impact upon your own specific circumstances moving forwards.
State Pension – Voluntary NI Contributions extended to 31 July 2023
In our January newsletter we shared an article (The State Pension – 5 things you should know – BRI Wealth Management (brigroup.co.uk)) highlighting the changes for those wishing to fill gaps in their National Insurance Contribution records. This is a very important “check” for all to do if you wish to qualify to receive the full State Pension.
As part of the transition to new State Pension arrangements, claimants were originally given until 5 April 2023 to be able to make contributions if there were gaps going back as far as 2006. This has now been extended by the Government to 31 July 2023 due to the level of enquiries. Post 31 July and going forward, claimants will only be able to go back 6 years.
Do review your own individual circumstances or speak with your usual BRI adviser.