Lifetime allowance abolished
From April 2023, the Lifetime Allowance (LTA) is going away. This means that people can save as much as they want in pensions for their lifetime.
There is still a limit on how much tax-free cash you can take out. You can take out up to 25% of your pension savings tax-free, but the most you can take out is £268,275. This is 25% of the current LTA.
Even though the different types of LTA protection won’t matter for the LTA charge anymore, they might still be important for how much tax-free cash someone can take out. If someone has a right to take more than £268,275 of tax-free cash because of their LTA protection, they can still get that amount under certain conditions. They can also start saving into their pension again from 6 April 2023 without losing their LTA protection.
Annual allowance changes
Starting in April, people will be able to contribute more to their pension each year and receive extra tax relief. With the “Annual Allowance” increasing to £60,000, this means an additional rate taxpayer could receive an extra £9,000 in tax relief. This may be especially appealing to those who will start paying additional rate tax for the first time when the threshold drops next year.
The rules for the tapering of the annual allowance for higher earners will change, meaning that even someone earning more than £360,000 can still contribute £10,000 rather than £4,000 previously. This saves them £2,700 in taxes.
The reduced annual allowance, which applies to those who have accessed their pensions, will also increase from £4,000 to £10,000. This is to encourage those who have started to draw income from their pensions to return to work full-time without being penalised for participating in their workplace pension scheme.
Additionally, those whose adjusted net income falls below £100,000 will have their personal allowance reinstated. This means that someone with an income of £160,000 contributing the full annual allowance could potentially benefit them even more.
Finally, if the highest earner in a household has a net income below £50,000, the child benefit tax charge will not apply. This, combined with the ability to contribute up to £60,000 into a pension, could make it more achievable for families to receive child benefit.
With the corporation tax changes coming in from 2023/24, this may make pension contributions even more attractive for those companies that will be paying higher corporation tax rates.
State Pensions
The following measures were announced prior to today’s Budget:
- The triple lock on the State Pension is maintained, guaranteeing the 10.1% CPI-based increase for next April along with the same increase to the Pension Credit.
- There has been an ongoing review of the State Pension age and whether the current timetable for changes is still appropriate.
Rates, tax bands and allowances for 2023/24
There were no further changes to those announced last November. To summarise, the key points for the 2023/24 tax year are:
Income tax
- Rates– Income tax rates for 2023/24 will remain at the basic, higher and additional rates of 20%, 40% and 45% respectively.
- Allowances and thresholds– The point at which additional rate tax becomes payable will be cut from £150,000 to £125,140 from 6 April 2023. This will mean that those already paying tax at 45% will pay an extra £1,243 in 2023/24. The Government forecast that approximately 250,000 individuals will pay some extra tax due to this measure.
- The personal allowance and basic rate band will be £12,570 and £37,700, respectively and are to remain frozen until April 2028. This means that the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance.
- Dividends– The dividend allowance is to be halved from £2,000 to £1,000 for 2023/24, and halved again to £500 for 2024/25. Consequently, many more investors will need to complete tax returns if their dividend income exceeds £1,000 next year. 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.
National Insurance
- NI thresholds will be fixed at the current 2022/23 levels. The changes to the thresholds at which individuals (both employed and self-employed) start to pay NI, introduced in July 2022, will remain – i.e. they’re kept in line with the annual personal allowance of £12,570.
Capital Gains Tax
- The CGT annual exemption will be cut from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. Consequently, based on 2021/22 figures, an estimated extra 235,000 individuals will need to file a self-assessment return in 2023/24.
- The rates of CGT will continue at 10% for gains falling in the basic rate band when added to income and 20% for gains exceeding the higher rate threshold (18% and 28%, respectively, for gains on residential property).
Inheritance tax
- The nil rate band (NRB) and residence nil rate band (RNRB) will remain at £325,000 and £175,000 until April 2028.
Corporation tax
- Corporation tax will rise to 25% from April 2023. However, small companies with profits below £50,000 will continue to pay at the current rate of 19%.
- There will also be a reintroduction of tapering relief for businesses with profits between £50,000 and £250,000 so that they pay less than the main rate.
