The main tax changes announced in the UK budget related to pensions. The predicted rise from £40,000 to £60,000 in the annual tax-free has now been confirmed. The real surprise, however, was the scrapping of the lifetime allowance (LTA). This was welcome news for those with larger pensions savings … but how long will it last?
First introduced by Gordon Brown in 2006 to bring in more tax from society’s wealthiest, the LTA arguably disincentivised pension saving. The allowance reduced significantly in recent years, dropping almost £800,000 between 2012 and 2022.
The Chancellor is almost certainly hoping that the decision to abolish the LTA will help retain the senior workforce within the NHS and even tempt some to return, stating that the changes will prevent 15,000 highly-paid workers from retiring early.
What do these changes to pensions mean?
With the lifetime allowance in place, anyone whose pension funds (excluding state pension) amount or grow to over £1,073,100 (unprotected LTA) would have to pay additional tax penalties of 55% when taken as a lump sum, or 25% for income or an overseas transfer. As of April 6, 2023, however, the LTA tax rate will effectively reduce to zero before being scrapped entirely in the 2024 Finance Bill.
Other pension changes effective from April 6, 2023 include:
- An increase to both the Money Purchase Annual Allowance and the minimum Tapered Annual Allowance from £4,000 to £10,000.
- An increase to the Annual Allowance for pension contributions from £40,000 to £60,000. Individuals will continue to be able to carry forward unused Annual Allowances from the three previous tax years.
- The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000.
- The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen for those without protections thereafter.
Do you need to act now?
For many people who have pension funds above £1 million (or who are likely to swiftly exceed this level) there may be options to transfer to a suitable alternative pension scheme depending on their personal situation. But it is worth seeking specialist, regulated advice to look at your specific situation now, as such a move is likely to take several months – and the clock is ticking towards the next UK general election, which may well see things change radically.
Following the budget, Shadow Chancellor Rachel Reeves stated the move was “the wrong priority, at the wrong time, for the wrong people” and that “a Labour government will reverse this move”.
The next UK general election must be held no later than January 24, 2025, and recent poll numbers suggest that Labour could very well form the next UK government.
The reinstatement of the lifetime allowance on pensions is certainly not guaranteed but given that senior members of a political party that could win the next election has made a definitive statement that could easily belong to an election manifesto, the possibility should not be ignored.
Other budget changes – income tax
The starting rate for savings will be frozen at £5,000, enabling individuals with less than £17,570 in employment income to receive up to £5,000 of savings income free of tax. Annual subscription limits for Junior Individual Savings Accounts (ISA) and Child Trust Fund accounts will remain at £9,000 and the annual subscription limit for adult ISAs remains £20,000.
The government will formalise and extend an existing income tax concession for low-income trusts and estates. Additionally, calculations and reporting will become more straightforward.
HMRC also intends to make changes to inheritance tax regulations to remove non-taxpaying trusts from reporting requirements.
The various income tax allowances and the National Insurance contributions thresholds will remain frozen until April 2028, and the additional rate threshold reduced to £125,140.
The government will restrict the scope of agricultural property relief and woodlands relief from inheritance tax to property in the UK from April 6, 2024. Further details are still to be announced.
The general inheritance tax nil rate band of £325,000 (unchanged since 2009) and the residential nil rate band of £175,000 remain frozen until 2028, which will result in more families paying more tax.
A reminder of the autumn statement tax allowance cuts
- A cut to the capital gains tax exemption threshold from £12,300 to £6,000 and then to £3,000 in the 2023/24 and 2024/25 tax years respectively.
- A 75% decrease in the dividend allowance, from £2,000 to £500 by April 2024.
Take personalised advice to ensure your tax planning is up to date, both for the UK and Portugal, and to full benefit from any positive tax reforms.
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; individuals should seek personalised advice.
You can find other financial advisory articles by visiting our website here 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).