Newsletter: April 2023
I thought it would be useful to summarise the changes in The Budget to pensions and taxation as it may affect you and also to let you know that we have launched our new website. Hopefully, you agree that this looks fresh and informative. Please keep your eye out for future articles and for new information. For example, you will see photographs of our staff and soon you will see our new colleague, Emma Stock. You may well receive correspondence from her in due course.
As we enter quarter two of 2023, I’m minded to point out a couple of things to you. Inflation remains persistent but is starting to fall. Sadly, it is not falling as quickly as hoped. This doesn’t mean prices of things you might buy will fall, it just means the rate at which they might go up will slow down. This is good news in that, when you fill up your car or do the weekly shop, prices will be more stable. Whilst the Bank of England still has a target for inflation to be no more than 2%, it will take them a while to get to this level, given the supply of basic food stuffs and energy is still tight.
The economic environment has been tough, however, there are early signs of businesses having weathered the issue of rising interest rates. Employment in the UK is still at a record high, as are the number of job vacancies. The (larger) high streets are still busy and restaurants and pubs are reporting better footfall.
On a global basis, China has now started to open up following the removal of its zero Covid policy and this should see the rest of the world benefitting from an increased supply of goods made by China and, therefore, lower prices. There should also be more demand for the things the rest of the world makes, as China buys more. It may take a little while for the improvements to be fully felt, and of course there’s always discussion to be had about the accuracy of economic data published by China, and they continually look to expand their territories, eg. Taiwan.
The USA has seen strong economic growth and improvements in the value of the dollar. They continue to have strong employment data, business failures are almost negligible and whilst higher interest rates have hurt consumers and businesses, the negative effects of these might be short lived. The recent failure of SVB bank in Silicon Valley is seen as an isolated issue. For the record, the Credit Suisse collapse and it’s forced sale have probably been on the cards for quite some time. The EU and UK bank sectors remain very strong and well capitalised. In other words, they have plenty of cash behind them!
Other parts of the world such as the emerging markets are heavily reliant on USA and Chinese growth, and they are likely to see economic improvements as a result of the world’s two largest economies working to fight off higher inflation and interest rates.
Now to pensions and the tax changes announced by the Chancellor. Apologies that these changes may not be relevant to you, but we think it is necessary to state it.
Announcements in the Spring Budget and last year’s Autumn Statement, mean that there will be a raft of changes to pensions and tax from April 2023. The changes affect, in particular, how much can be paid into and taken out of pensions, income tax and capital gains tax.
Pensions and Lifetime Allowance charge
Currently, if you have or expect to have, more than £1.073m in your pension fund, then the excess above this figure would suffer a Lifetime Allowance Charge, effectively a tax deduction.
However, the lifetime allowance charge will now no longer be applied from 6 April 2023 to the retirement benefits you take, that are in excess of the lifetime allowance. The lifetime allowance will remain unchanged and in place in 2023/2024 and pensions will be tested against it when they are fully switched on upon retirement or death, or when a client reaches age 75, in the same way as before April 2023.
Any excess amount over the lifetime allowance paid out as a lump sum will be treated as income and will be taxed at the recipient’s marginal rate of income tax only. The expectation is that the lifetime allowance will be abolished from April 2024, although this will require new primary legislation.
Annual allowance
The amount you can pay into a pension each financial year is called your ‘annual allowance’ and this will increase from £40,000 to £60,000 from April 2023.
For those of you with very high earnings, the minimum tapered annual allowance will increase from £4,000 to £10,000 from 6 April 2023 and the adjusted income used in calculating the tapered annual allowance will increase to £260,000. The threshold income amount will remain unchanged at £200,000. This means that the minimum tapered annual allowance of £10,000 will apply to clients with adjusted income in excess of £360,000.
If you have taken income from your personal pension, then previously the amount you could then pay back into a pension was limited to just £4,000 pa. This is called your ‘Money Purchase Annual Allowance’. The money purchase annual allowance has increased from £4,000 to £10,000 from 6 April 2023. This is great news for those of you who have accessed your pension but are still working, and you and your employer still contribute to pensions. There’s a bit more wiggle room for you to add to your pension.
These changes will not apply retrospectively for clients looking to carry forward unused allowance from previous tax years.
Enhanced and fixed protection
Clients who held enhanced protection or fixed protection on 15 March 2023 will be able to make further contributions and transfers from 6 April 2023 and retain their protection.
Tax free cash
Following the abolition of the lifetime allowance, there will still be a cap on the total tax-free cash you can take of £268,275. This is 25% of the current standard lifetime allowance. The Budget document suggested that clients with tax free cash entitlement in excess of this, or who have scheme specific tax-free cash protection, will retain their entitlement but legislation will be needed to confirm this. Entitlement will remain unchanged in 2023/2024.
Income tax and National Insurance
There are no changes to the rates of income tax and National Insurance in 2023/2024.
The income at which additional rate tax becomes payable will reduce from £150,000 to £125,140 from 6 April 2023 while the personal allowance and basic rate band will remain at £12,570 and £37,700 respectively. This means that the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance. The dividend tax allowance will reduce from £2,000 to £1,000 from 6 April 2023 and is planned to reduce further to £500 from 6 April 2024. The dividend tax rates for basic rate, higher rate and additional rate taxpayers will remain at 8.75%, 33.75% and 39.35% for 2023/24.
Capital gains tax
The CGT annual exemption will reduce from £12,300 to £6,000 from 6 April 2023 and is planned to reduce further to £3,000 from 6 April 2024. The rates of CGT will remain at 10% for gains falling in the basic rate band (when added to income) and 20% for gains exceeding the higher rate threshold, or 18% and 28% respectively for gains on residential property. So those of you with rental properties, remember, there is likely to be an additional tax charge when you come to sell.