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Faye Church, Senior Financial Planning Director, Investec Wealth & Investment (UK):
The Autumn Statement brought with it a series of stealth tax rises through extended freezes to the majority of tax thresholds. The effects are still to be seen, but the Spring Budget is incredibly important and has to resonate with voters prior to local elections in May 2023.
So what has the Chancellor done to help ease us through the cost of living crisis, meet his pledge to halve the rate of inflation, encourage people out of early retirement and reduce the national debt within the next five years?
Income Tax threshold remains frozen
A freeze in the income tax threshold in the Autumn Statement is due to hit us in the new tax year, along with the cut in the additional rate tax threshold from £150,000 to £125,140 on 6 April 2023. While the Chancellor has wisely not added to these changes announced in November, many are yet to feel the pinch on top of the huge rise in inflation rates we have recently seen.
Careful financial planning can help lower income levels for those affected by the cut in the additional rate tax threshold through pension contributions. Investment in alternatives to pensions such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) can also enable you to claim back some of the additional tax paid. It is important to note that these investments carry higher risk than other options available and there will be qualifying criteria for tax relief benefits.
Where appropriate, redistributing income producing assets between spouses is also worth considering.
Pensions boost for savers
The abolishment of the Lifetime Allowance and the increase of the Annual Allowance have potentially enabled millions of savers to take advantage of the tax efficiencies of pensions to boost their retirement savings.
These two simple changes will benefit those who have already reached the current Lifetime Allowance, or who maximise their Annual Allowance each year. It will be most welcomed by those who have an appetite to increase their pension pot ahead of retirement.
Lifetime Allowance is abolished
The Lifetime Allowance, the maximum amount you can hold within a pension during your lifetime, will be abolished from April 2024, with the Lifetime Allowance charge removed from April 2023. This is a much welcomed lifeline not only for those that wish to save more for retirement, but also those that already find themselves over the Lifetime Allowance. For the medical profession, the low Lifetime Allowance has been a driver for some to retire early as they fear being penalised for accruing large pension entitlements.
Many savers in defined contribution pensions have unwittingly fallen foul of this allowance due to healthy investment performance, through no fault of their own. In 2016 the FTSE100 stood at around 6,000, whereas today we see it around 7,400; an increase of 23%. Over the same period the Lifetime Allowance has been fixed at just over £1m, making pension pots close to, or at the Lifetime Allowance, an easy tax target and barrier to further saving.
It is worth noting that even though the Lifetime Allowance has been removed, there is still a cap on the amount of tax free cash you can take from your pension, without having protected it, of £268,275.
There is also a small window of opportunity for those who are due to retire this year to maximise their pension contributions, if they are already over the current Lifetime Allowance. There could even be scope to carry forward any unused contributions from the previous three years, allowing a possible gross £160,000 contribution in total. However, we urge you to seek expert financial advice ahead of making plans.
The abolishment of the Lifetime Allowance and the increase of the Annual Allowance have potentially enabled millions of savers to take advantage of the tax efficiencies of pensions to boost their retirement savings.
Annual Allowance increases from £40,000 to £60,000
The Annual Allowance, or limit to pension contributions each year, will increase from £40,000 to £60,000 from April 2023.
Where the Annual Allowance has been frozen at £40,000 since 2014, some individuals with a final salary scheme have found themselves being penalised as the pension benefits they accrue each year have increased, yet the maximum they can accrue has stood still.
This increase also benefits those who can afford to contribute up to £60,000 gross into their pension and also have the income to validate and receive the tax relief.
The highest earners will still be limited by the Tapered Annual Allowance and adjusted income threshold, although the adjusted income threshold will be increased to £260,000 and the Tapered Annual Allowance to £10,000.
Money Purchase Annual Allowance increases from £4,000 to £10,000
The current rule limits the contributions into a pension to £4,000 per annum once income benefits have been taken from a Money Purchase Pension. An increase in this allowance will allow those looking to return back to work to receive pension benefits available without being penalised.
Incentives for working parents increase
The Chancellor appreciates that the cost of childcare can be a barrier for some parents to return back to work. An extension to the 30 hours of free childcare for one and two-year-olds is welcome news for parents whose net earnings are being swallowed by increasing childcare costs and costs of living.
Capital Gains Tax exemption still to fall
The Capital Gains Tax annual exemption is due to fall from £12,300 to £6,000 on 6 April 2023, and halve again from April 2024. This remains unchanged and each time the allowance is reduced it becomes increasingly important to take advice on where your monies are invested and the implications of making withdrawals from certain types of investment portfolios.
Using tax efficient wrappers such as ISAs will become increasingly important, as well as maybe considering alternative wrappers such as offshore investment bonds.
Dividend Tax Allowance to fall
The news that the dividend tax free allowance will reduce to £1,000 in 2023 and to £500 in 2024 has hopefully been absorbed by business owners who have the flexibility to choose whether they pay themselves via salary or dividend. Again, this represents no change since the Autumn Statement, but there will be many who see their net income reduce as a result of this from 5 April 2023.
Investors who rely on dividends to provide them with an income should seek advice on whether a dividend producing asset is still the most tax-efficient way of generating an income.
Inheritance Tax Nil Rate Bands still apply
Frozen Inheritance Tax Nil Rate Bands still apply. However, there are a lot of different ways to help reduce any inheritance tax due, so please do seek advice as the tax savings can be hugely beneficial.
How have investment markets reacted?
John Wyn-Evans, Head of Investment Strategy, Investec Wealth & Investment (UK):
It is very difficult to disaggregate any market reaction to today’s budget from much greater market volatility related to continuing concerns about the banking sector. These were set off by the bankruptcy of Silicon Valley Bank last week, but have since extended to worries about the sustainability of Credit Suisse in its current form. Even so, against this difficult background, Chancellor Jeremy Hunt delivered his second budget, and one that continues to rebuild investor confidence in the UK’s fiscal position.
In terms of the economic message, there was mixed news from the Office for Budget Responsibility, which provides independent forecasts for the UK economy. While allaying fears of a more immediate recession, its outlook for longer-term growth was less rosy. This might well have been the driving force behind the Chancellor’s desire to improve the UK’s potential growth rate with his emphasis on Enterprise, Employment and Education. The more immediate effects will be felt in the first two. Capital allowances on investment will be set at 100% for the next three years, which is positive for industry.
We see no reason for disappointment in today’s statement, and Chancellor Hunt remains a very safe pair of hands.
Perhaps his biggest play was to try to entice some of the seven million working age people who are not currently employed back into labour markets. This could help to reduce inflationary pressures in the economy driven by higher wages, and would certainly help to reduce the upward pressure we have seen on interest rates and mortgage rates. However, it will take some time to take effect. One of the policy changes involved abolishing of the lifetime allowance cap on the value of personal pensions, which turned out to be the furriest rabbit pulled from the Chancellor’s hat. Although this was expressly aimed at preventing doctors, in particular, from retiring early, it will be of great benefit to holders of substantial defined contribution pensions who were faced with higher taxation based upon the size of their pots. We note that shares in quoted pension providers and administrators jumped on this news, and this was really the only discernible market outcome from the whole speech.
In summary, we see no reason for disappointment in today’s statement, and Chancellor Hunt remains a very safe pair of hands. Given what else is going in markets, today would have been an unfortunate day to take any risks with the country’s finances. Instead, we can hope for calmer waters to prevail in future, at which time Mr Hunt might be in a position to be somewhat more generous in the run up to the next General Election, which must be held by January 2025 at the latest.
Please get in touch if you’d like to speak to one of our financial planners today.
Important information
Opinions, interpretations and conclusions represent our judgement as of this date and are subject to change. Tax treatment depends on the individual circumstances of each client and may be subject to change in future. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change.
Important information
The information in this document is believed to be correct but cannot be guaranteed. Opinions, interpretations and conclusions represent our judgment as of this date and are subject to change. Past performance is not necessarily a guide to future performance. The value of assets such as property and shares, and the income derived from them, may fall as well as rise. When investing your capital is at risk. Copyright Investec Wealth & Investment Limited. Reproduction is prohibited without permission.
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