UK Chancellor Jeremy Hunt delivered his Autumn Statement to Parliament on November 22. For UK residents, the good news was the cuts in National Insurance Contributions, though income tax thresholds remain frozen. It was also confirmed that three new pension allowances will be introduced following the abolition of the Lifetime Allowance.
Reductions for tax and National Insurance contributions
In response to the swifter-than-anticipated economic recovery and a halving of inflation rates, the government outlined a series of tax cuts and fiscal adjustments to bolster the financial well-being of citizens.
Effective from January 6, 2024, the main rate of Class 1 employee National Insurance Contributions (NICs) will be reduced from 12% to 10%, while the main rate of Class 4 self-employed NICs will decrease from 9% to 8% from April 6, 2024. Mandatory Class 2 self-employed NICs will cease from April 6, 2024.
Tax allowances remain frozen
The National Insurance cuts are welcome, but only partially offset the fiscal drag created by the frozen income tax thresholds. The budget did not include any plans to remove the freeze, currently scheduled until 2028.
Often referred to as ‘tax by stealth’ or ‘hidden tax rises’, freezing thresholds and allowances results in many taxpayers paying more tax over time.
The pension triple lock rise
The budget confirmed that the government will honour its commitment to the pensions triple lock, which means the State Pension will rise by 8.5% from next April, in line with earnings.
The ‘triple lock’ principle underscores a commitment to augment the state pension by the highest of three metrics: average earnings growth, Consumer Prices Index (CPI) inflation, or a minimum of 2.5%.
New pension allowances
Legislation proposed in the Autumn Finance Bill 2023 eliminates the Lifetime Allowance, offering clarity on the taxation of lump sums, death benefits and the tax treatment for transfers to overseas pensions.
The ‘Lump Sum Allowance’ and the ‘Lump Sum Death Benefit Allowance’ were anticipated. However, official documents published the same day as the Autumn Statement also revealed that an ‘Overseas Transfer Allowance’ will apply from April 2024.
Lump Sum Allowance
The Lump Sum Allowance (LSA) applies to payments made during the pension scheme member’s lifetime. It will be set at a fixed limit of £268,275 (25% of £1,073,100).
It encompasses tax-free cash from Pension Commencement Lump Sums (PCLS) and Uncrystallised Funds Pension Lump Sums. Notably, it also includes trivial commutation lump sums, small lump sums and winding-up lump sums with uncrystallised rights, which were not previously tested against the Lifetime Allowance (LTA) and did not require reporting.
The Lump Sum Death Benefits Allowance
The Lump Sum and Death Benefit Allowance (LSDBA) will have a fixed limit of £1,073,100 and be applicable to death lump sum payments.
When the death benefit is paid as a lump sum, it will only be tax-free if it falls below the deceased’s remaining LSDBA. Any excess will be taxable at the beneficiary’s marginal rate of income tax. This applies regardless of the member’s age when they die.
If the pension fund is designated to drawdown within two years of the death, and the benefit is taken as pension income, the age of death remains relevant, as is currently the case. If the death occurs before age 75, the payment will be tax free. If it occurs after age 75, the recipient will pay income tax.
The Overseas Transfer Allowance
The new Overseas Transfer Allowance (OTA) is a measure to tax transfers of registered pension schemes out of the UK into Qualifying Recognised Overseas Pensions Schemes (QROPS), for any amount that exceeds the individual’s available allowance.
The allowance will be the same as the LSDBA – £1,073,100.
From the information released so far, one could conclude that the Overseas Transfer Allowance metaphorically replaces the Lifetime Allowance for overseas transfers. While transfers into QROPS were tested against the Lifetime Allowance until April 2023, from 2024 they will be tested against Overseas Transfer Allowance. Any excess will now be subject to the Overseas Transfer Charge of 25%.
The proposed law is yet to receive royal assent, but it is possible it could have a positive impact on those who currently fall outside of the current exclusions, potentially saving them £268,275. Conversely, individuals with larger pension funds within the current exclusions would be subject to a 25% overseas transfer charge on any amount that exceeds 1,073,100.
If you think any of these announcements could affect you, take personalised advice on what impact they may have. These reforms make an already complex regime even more of a minefield, particularly for expatriates, so it is important to take personalised, regulated cross-border advice.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
Keep up to date on the financial issues that may affect you on the Blevins Franks news page at www.blevinsfranks.com.
By Adrian Hook
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Adrian Hook is a Partner of Blevins Franks in Portugal and has been providing holistic financial planning advice to UK nationals in the Algarve since 2008. He holds the Diploma for Financial Advisers (DipFA) and is a member of the London Institute of Banking and Finance (LIBF).