Analysing the...
Budget for Growth
The Chancellor Jeremy Hunt’s Budget last Wednesday (15 March) had one overarching goal: to steady the ship of the British economy amidst banking turmoil in the United States.
Hunt’s Budget also provided an opportunity for the Chancellor to distance himself from the disastrous ‘mini’ budget of his predecessor Kwasi Kwarteng back in September.
Therefore, few economic commentators were expecting any big surprises from what Hunt described as his ‘Budget for growth’. But in the end, there was one unexpected giveaway: the abolition of the pensions lifetime allowance (LTA).
The LTA is the total amount you can build up in all your pension savings without incurring a tax charge. First introduced in 2006, the LTA was originally set at £1.5 million. This figure has been reduced over the years and currently stands at £1.073 million. However, from April 2023 LTA tax charges will be removed, with the government legislating to abolish them altogether from 6 April 2024.
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What the change to LTA could mean for you
The LTA currently limits how much you can build up in your pension while still enjoying the full tax benefits. Up to now anything over the £1.073 million figure has been subject to a punitive tax charge. This applies to all personal and workplace pensions but excludes the state pension.
As things stand, someone with a final salary pension would trigger the lifetime allowance tax penalty if their annual pension income increased to around £53,000, hitting higher-earning public sector workers with a tax charge. The Chancellor has argued that the cap on tax-free pensions was causing many high earning professionals - including NHS consultants and GPs - to take early retirement in order to avoid being hit by the penalty. As a result of the announcements made in the budget this is set to change: it will soon be possible to build up pension benefits, of any size, over a lifetime while still enjoying tax benefits.
The Chancellor has argued that the cap on tax-free pensions was causing many high earning professionals - including NHS consultants and GPs - to take early retirement in order to avoid being hit by the penalty.
Individuals with savings more than the LTA have historically been able to apply to retain a higher ‘protected’ LTA. Those with LTA protection in place will no longer be required to comply with protection conditions; however, individuals with protected entitlement to tax free cash can retain it. The maximum limit on tax free cash will be frozen at its current level of £268,275 from 6 April 2023.
More changes to pensions
The Chancellor increased the Annual Allowance (AA) for pensions contributions from £40,000 to £60,000 from 6 April 2023. The AA is the maximum amount of tax-relieved pension savings that an individual can make in a tax year.
The Chancellor also restored the Money Purchase Annual Allowance (MPAA) to £10,000. This applies to those who flexibly access their pension and was another quirk in the system that was potentially putting some older people off from returning to work.
Meanwhile the Tapered Annual Allowance (TAA) will rise to £10,000 and the adjusted income threshold for the TAA is rising to £260,000.
Much of this serves to prove that pension planning is not as simple as it should be, but please contact us to discuss how this may affect you personally now and in the future.
Other areas covered in the budget
Inheritance Tax
Government revenues from inheritance tax (IHT) are significantly increasing year on year because of the freezing of the threshold at which you are not liable to pay inheritance tax. Meanwhile the value of assets continues to rise, dragging more people into the base rate of inheritance tax.
Inheritance tax cannot be avoided - but it can be planned for.
There is normally no IHT to pay if your estate is worth less than £325,000. Moreover, married couples benefit from special rules that reduce or completely wipe out inheritance tax on first death.
But be warned: unmarried couples – whether they are cohabiting or not - do not benefit from the same exceptions as married couples. For example, if you are cohabiting with your partner but are not married, current IHT rules stipulate that on the first death any assets in excess of £325,000 will be taxed at 40 per cent.
There can be a very real risk that cohabiting couples end up being double-taxed, paying inheritance tax on both the first death and again on the second. Frozen inheritance tax thresholds mean that more cohabiting but unmarried couples are at risk of being unwittingly clobbered by IHT on the death of a partner.
Feel free to reach out to one of our specialist advisors to talk through any of the tax changes announced in last week’s budget or how to plan effectively for inheritance tax.
Are you unsure about any of the tax changes?
Feel free to reach out to one of our specialist advisors to talk through any of the tax changes announced in last week’s budget or how to plan effectively for inheritance tax.