Pension Changes
The Chancellor announced that the Lifetime Allowance (LTA) will effectively be removed from 6 April 2023, so it will mark the end of the possibility of a recovery tax charge for a large pension fund. The LTA tax charge will be set at 0% from 6 April 2023 and the LTA abolished from 6 April 2024. This is to allow time for the necessary legislation to be passed.
This means that there will be no longer be a cap on the maximum size of a pension fund and will allow a pension fund which is fully funded currently to be increased.
There will however be a cap on pension tax-free at 25%, subject to a maximum of £268,275, which is 25% of the current LTA.
It is important to note, that individuals currently holding LTA Transitional Protection will be able to continue benefiting from it where it provides for tax-free cash in excess of £268,275. Further pension contributions will be permitted for these individuals without losing their existing protection. Scheme specific tax-free cash entitlements in excess of 25% or stand-alone lump sum rights can also be retained.
The pension Annual Allowance will increase from £40,000 to £60,000. The aim of these changes is to encourage more older people back to work, including early retirees such as doctors who left employment for pension reasons.
The Money Purchase Annual Allowance (MPAA) and minimum tapered Annual Allowance for high earners will be increased from £4,000 to £10,000.
With regard to high earners, the adjusted income threshold rises to £260,000, whilst the threshold income figure remains at £200,000. This should take more people out of the scope of tapering of the Annual Allowance.
The ability to pay up to £60,000 into a pension each year should help more people preserve their Personal income tax allowance; in practice a pension contribution of £60,000 for an individual earning £160,000 would bring their taxable income back down to £100,000, so they would regain their personal allowance for income tax purposes.
In a similar manner, a pension contribution can be made to reduce income for Child Benefit purposes and avoid the Child Benefit being lost where income exceeds £50,000.
The Labour Party has announced it would reverse the pension changes outlined above if it wins the next general election. This creates uncertainty for clients with regard to future pension planning.
State Pension
The triple lock on the State Pension is maintained, guaranteeing the 10.1% CPI-based increase for next April along with the same level of increase to the Pension Credit.
There has been an ongoing review of State Pension age and whether the current timetable for changes is still appropriate. The Government have said they will publish their response by May this year.
Tax Rates, Bands and Allowances for 2023/24
There were no further changes to those announced in November 2022.
Income tax rates remain at 20%, 40% and 45% with the Additional rate tax band reducing to £125,140 from £150,000. The personal allowance and tax bands are frozen until April 2028 raising significant additional tax revenue from the effects of fiscal drag.
The dividend allowance is to be cut to £1,000 from £2,000 and halved again to £500 in April 2024. The dividend tax rates remain at 8.75%, 33.75% and 39.35%.
Capital Gains Tax
The CGT Annual Exemption is halved from £12,300 to £6,000 from April 2023 and halved again to £3,000 from April 2024. The rates remain at 10% and 20% for investments and 18% and 28% for property.
Inheritance Tax
The Nil Rate Band and Residence Nil Rate Band are both frozen at £325,000 and £175,000 until April 2028.
Corporation Tax
The main rate of Corporation Tax will increase by 6% from 19% to 25% from April 2023. Small companies will profits under £50k will continue to pay 19% with a taper up to 25% for companies with profits under £250,000.
National Insurance
The NI thresholds will remain at 2022/23 levels.
Please note, this article does not constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch, telephone 01392 875500, info@SeabrookClark.co.uk