There was perhaps less drama in the Spring Budget 2023 than there was in the build up to Jeremy Hunt’s first Autumn Statement, but it is a day that may live long in the memory of some, following significant pension reforms.
It was a great day for those who have previously been limited by the amount they could save into their pensions, whether that be for high income individuals or those who have found their planning restricted by the lifetime allowance.
There are significant income tax and inheritance tax (IHT) benefits to be gained following the Budget, and more detail on each of the key changes is given below.
Lifetime Allowance Abolished
With effect from April 2023, the Lifetime Allowance charge is to be abolished.
The Lifetime Allowance imposed punitive tax penalties on those who built up pension funds with a capital value in excess of £1,073,100, effectively capping the value of pension funds that many individuals would seek to build up.
This presented issues for those in valuable defined benefit pension schemes such as doctors and judges, and the general view is that abolishing the Lifetime Allowance may encourage more public sector workers to stay in work longer. Whilst the headline was very much to help retain NHS staff, the change also means other employees with SIPPs and director-shareholders of owner-managed businesses will be able to save significantly more into their pensions going forward with the added tax benefits they bring.
Inheritance Tax Benefits
In addition to the removal of tax charges in lifetime, one of the key benefits for many individuals will be the ability to build up further funds within a pension which is outside their estate for IHT purposes, thereby potentially allowing a greater proportion of wealth to be passed on to family members rather than HMRC.
For those with sufficient capital to meet their lifetime needs without accessing their pension, the removal of the Lifetime Allowance brings an opportunity to maximise the value within this IHT-friendly vehicle whilst further reducing their taxable estate by spending capital which would otherwise be subject to IHT.
Annual Allowance Increased
Coupled with the removal of the Lifetime Allowance is also the increase of the Annual Allowance to £60,000. Individuals can be subject to tax charges on amounts saved into their pension in excess of the Annual Allowance, so again this is welcome news for those who wish to make large personal contributions and/or those receiving large annual contributions from their employer.
This is also beneficial for workers with defined benefit pension schemes where it is not uncommon for pension benefit accruals to result in Annual Allowance tax charges. Indeed, Mr Hunt has suggested these measures will prevent an estimated 80% of NHS doctors from receiving a tax charge.
Tapering of the Annual Allowance will now start for individuals with adjusted income in excess of £260,000, and the minimum Annual Allowance/money purchase Annual Allowance will be increased from £4,000 to £10,000.
Tax-Free Lump Sum Frozen
Despite the changes to the Lifetime Allowance, there is no change to the amount which can be taken from pension funds as a tax-free lump sum. This is retained at £268,275 (25% of the current lifetime allowance) and will be frozen thereafter until any future changes are made. For those with fixed or enhanced protection, no changes are anticipated to the level of the tax-free lump sum which can be taken.
If you would like to discuss any of the changes in the Budget and how they may impact your tax position, please get in touch with Tom Andrew or your usual Sagars contact.