Budget

Spring Budget 2023

15 min read 15 Mar 23

By The Technical Team

Jeremy Hunt delivered his Spring Budget on 15 March.

Very much a budget that put the focus on pensions which were left alone in the Autumn Statement 2022. Although there is an impact for trusts with a simplification of tax measure.

You can read all the changes below.

Summary

Pensions

Lifetime Allowance

What did the Chancellor say?

The Chancellor announced in his speech;

“Some have also asked me to increase the Lifetime Allowance from its £1 million limit. But I have decided not to do that.

Instead I will go further and abolish the Lifetime Allowance altogether. It’s a pension tax reform that will stop over 80% of NHS doctors from receiving a tax charge, incentivise our most experienced and productive workers to stay in work for longer and simplify our tax system, taking thousands of people out of the complexity of pension tax.”

What does this mean for the planner?

In the budget paperwork it has been confirmed that the Lifetime Allowance (LTA) charge will be removed for the 2023/24 tax year. This will then be abolished from April 2024 in a future Finance Bill.

Additionally Pension Commencement Lump Sum which for most has been capped at the lower of 25% of the fund value or 25% of their available LTA at the time this sum is taken will change. This measure will set a PCLS upper monetary cap of £268,275 (25% of the current LTA) and will be frozen at this amount. However, those individuals who already have a protected right to take a higher PCLS will continue be able to do so.

Further to this, where LTA excesses were paid as lump sums, they were subject to a standalone 55% tax charge. From 6 April 2023 this measure ensures that, in such cases, these lump sums are instead taxed at an individual’s marginal rate of income tax.

The devil will be in the detail of the Spring Finance Act on the LTA charge change and the future Finance Act that will deal with the LTA abolition. Clarification will be needed for those with scheme specific tax free cash along with details on those with enhanced or fixed protection as to whether or not they can start contributing to pensions again given there is still technically a LTA for 2023/24.

Furthermore, just because the LTA is being removed the key issue is net benefit for the client. For a higher rate taxpayer now and in retirement if the contribution made will not obtain PCLS then it could be a cost neutral exercise for them. It would cost them £60 to get £100 in a pension, and when taken if taxed at 40% they would get their £60 back assuming no growth. This would still be better than the current rules where if they had the 25% LTA charge applied the would have received £45 back.

However, under the new rules with no LTA charges if they were basic rate in retirement this would return them £80 (a 33.33% return).

There may also be other issues such as IHT planning to take account of, but this would then depend on the beneficiaries marginal rates of taxation.

Annual Allowance

What did the Chancellor say?

The chancellor stated;

“I have listened to the concerns of many senior NHS clinicians who say unpredictable pension tax charges are making them leave the NHS just when they are needed most.

The NHS is our biggest employer, and we will shortly publish the long-term workforce plan I promised in the Autumn Statement.

But ahead of that I do not want any doctor to retire early because of the way pension taxes work.

As Chancellor I have realised the issue goes wider than doctors.

No one should be pushed out of the workforce for tax reasons.

So today I will increase the pensions annual tax-free allowance by 50% from £40,000 to £60,000.

What does this mean for the planner?

In short this means more Annual Allowance (AA) will be available from 2023/24! The increase in these allowances for those with career average schemes may be increased in times of high inflation. Increasing the AA will also limit those facing AA excesses that cannot be mitigate by carry forward.

For those in defined contribution schemes this will give them a higher value of total pension contributions that can go into pensions from them, their employers or a third party paying on their behalf. 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.

Public Sector Aggregation

What did the Chancellor say?

Again nothing was mentioned by the Chancellor in his speech. The policy documents detail the intention to allow Pension Input Amount aggregation between open and closed public service pension schemes from April 2023.

What does this mean for the planner?

For those in public sector pension schemes with membership of open and closed pensions there have been instances where the pension input amount for the closed scheme would be negative, but is then set at zero legislatively. Where the open scheme has positive inputs the “negative” input cannot be used to offset this.

From April 2023 public sector workers will be treated as having one arrangement for the purposes of calculating the Pension Input Amount and resulting Annual Allowance (but only where the arrangements are for the same workforce).

Potentially this may free up annual allowance that would otherwise have been used for further contributions.

Tapered Annual Allowance

What did the Chancellor say?

Again nothing was mentioned by the Chancellor in his speech. The Tapered Annual Allowance minimum will increase from £4,000 to £10,000 and the adjusted income limit from £240,000 to £260,000 form 6 April 2023.

What does this mean for the planner?

Good news for the higher earners that have been in the tapered annual allowance, as this will increase by 150% as the MPAA has increased. Presently from adjusted income of £300,002 individuals would have less than £10,000 of AA left due to tapering and would reach the minimum taper of £4,000 at £312,000 of adjusted income (assuming they are also above the threshold income limit of £200,000 (which is not changing)).

From 6 April 2023 those with adjusted income of £360,000 will be at the minimum tapered level. This may mean there is more scope for pension contributions for next tax year for higher earners that have adjusted income above £240,000.

Money Purchase Annual Allowance

What did the Chancellor say?

Nothing was mentioned in the chancellors speech specifically around this. But the Money Purchase Annual Allowance (MPAA) will be increasing from £4,000 to £10,000. This is part of the measure to encourage older workers back to employment.

What does this mean for the planner?

Again good news for clients that have already triggered the MPAA, from 6 April 2023 the amount they can pay into money purchase pensions is increasing by 150%. This will still apply on contributions from them, their employers or a third party paying on their behalf.

It could also bring income recycling back into the equation for some clients, although the total charges including initial adviser charging can limit or negate the effectiveness of this. Combined with the cap on PCLS this may be more limited as an effective route for those with larger pension plans.

Tax and Trusts

Simplification for trusts and estates

What did the Chancellor say?

To simplify administration, the government will formalise and extend an existing income tax concession for low income trusts and estates and provide further changes to make calculations and reporting more straightforward. HMRC also intend to make changes to inheritance tax regulations to remove non-taxpaying trusts from reporting requirements. The “main changes” will have effect from 6 April 2024. But, the technical amendments to ensure an estate beneficiary’s tax credit and savings allowance continue to operate correctly will have effect for tax year 2023/24 onwards.

What does this mean for the planner?

The background is that in Spring/Summer 2022, HMRC consulted on proposals to formalise and extend a concession that removes trusts and estates from income tax where the only source of income is savings interest and the tax liability is below £100; and on related reforms relating to low income trusts and estates.

Currently, the trustees of discretionary trusts and Accumulation & Maintenance trusts pay tax on the first £1,000 p.a. slice of trust income at only 20% basic rate and dividend income is taxed at 8.75%. Where the trustees´ annual income exceeds £1,000, the excess is chargeable at the Rate Applicable to Trusts (RAT) which is 45% for non-dividend income and 39.35% for dividend income. The budget measure changes this on two fronts. Firstly, trusts and estates with income up to £500 will not pay income tax. For the avoidance of doubt, the £500 limit also applies to interest in possession trusts. Where a settlor has a number of current trusts, this £500 limit will be proportionately reduced for accumulation and discretionary trusts, to a minimum of £100. Note that interest in possession trusts, settlor-interested trusts, and vulnerable beneficiary trusts will not be taken into account when proportionately reducing the £500 limit for accumulation and discretionary trusts. Secondly, the budget measures remove the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of discretionary trust income. Where a settlor has made more than one trust, the £1,000 band is proportionately reduced subject to a minimum of £200.

These measures serve as a reminder that trustees of discretionary trusts with income exceeding £500 will be chargeable at 45% for non-dividend income and 39.35% for dividend income. If that after tax income is being accumulated by the trustees then that tax suffered is costly from a reinvestment perspective. When that income is distributed, the complexities of tax ‘pools’ come into play. Non-income producing Investment bonds offer a popular and simpler investment for trusts where the trustees have the power to accumulate income.

This £500 income limit also applies to personal representatives (PRs). Currently, they pay income tax at 20% and 8.75% for dividend income. When income arising during the administration period is distributed to a beneficiary, the beneficiary includes the gross equivalent in his/her tax return and the personal representatives provide the beneficiary with Form R185 showing the amount of estate income paid to that beneficiary and the amount of tax suffered on that income.

Under the budget changes, beneficiaries of UK estates will not pay tax on income distributed to them that was within the £500 limit.

The final budget measure impacts PRs/deceased’s estates. It provides that the income received by an estate beneficiary is savings income (and so the beneficiary’s savings ‘allowances’ can apply) where it was savings income of the PRs and clarifies that an estate beneficiary’s gross taxable income and tax credit should reflect the tax previously paid by the PRs. This might correct the anomaly with bond gains in the situation that the PRs encash where the beneficial owner has died but the bond has continued due to the existence of another life assured. Any chargeable event gain arising on the encashment by the PRs will be treated as income of the estate and the PRs are liable for tax on that gain. An encashment gain on an offshore bond will be taxed on the PRs at 20% (no tax to pay with a UK bond thanks to the ‘basic rate credit). The anomaly occurs when the bond proceeds are later distributed to the beneficiary who then includes the gross amount in their tax return – the beneficiary is assessed as receiving estate income rather than incurring a chargeable event gain. The beneficiary is entitled to a 20% credit in respect of the tax already suffered whether the bond was onshore or offshore. But, top slicing relief is not available to the beneficiary who is taxable under estate income rules rather than chargeable event rules. Whether further income tax is payable by a beneficiary, or not, depends on the personal tax situation of each person. In contrast, if the PRs assign the bond to the beneficiary then that assignment would not trigger a chargeable event and top slicing relief could then apply to future encashment gains.

Freezing savings tax reliefs

What did the Chancellor say?

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 will remain at £20,000.

What does this mean for the planner?

Good news really. Also worthy of note is that the Personal Savings Allowance (PSA) for 2023/24 remain at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

Share schemes

What did the Chancellor say?

The government will be launching a call for evidence on the Share Incentive Plan (SIP) and Save As You Earn (SAYE) employee share schemes. The government will use the call for evidence to consider opportunities to improve and simplify the schemes.

What does this mean for the planner?

These schemes are highly valued by those who qualify and potential improvements and simplification are likely to be welcomed by employees and advisers alike.

Capital Gains Tax

What did the Chancellor say?

These measures are likely to affect spouses or civil partners who are in the process of separating.

What does this mean for the planner?

For those spouses and civil partners who are in the process of separating, this measure gives them more time to transfer assets between themselves without incurring a possible CGT charge. The proposed revisions are as follows.

Separating spouses or civil partners be given up to three years after the year they cease to live together in which to make no gain/no loss transfers.
No gain/no loss treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement.

A spouse or civil partner who retains an interest in the former matrimonial home be given an option to claim private residence relief (PRR) when it is sold.
Individuals who have transferred their interest in the former matrimonial home to their ex-spouse or civil partner and are entitled to receive a percentage of the proceeds when that home is eventually sold, be able to apply the same tax treatment to those proceeds when received that applied when they transferred their original interest in the home to their ex-spouse or civil partner.

The changes apply to disposals that occur on or after 6 April 2023.

Venture Capital Schemes: expansion of the Seed Enterprise Investment Scheme (SEIS)

What did the Chancellor say?

This measure increases the existing limits that apply to company access and use of the SEIS and the investment amounts on which individuals can claim tax reliefs.

What does this mean for the planner?

Legislation will be introduced to amend the limits on the size and age of the companies that can access the SEIS as well as on the amounts that they can raise and on which investors can claim income tax and capital gains tax reliefs. The following are to be increased:

The ceiling that applies to the investment a company can raise in the relevant period and on which investors can claim relief - from £150,000 to £250,000.
The limit that applies at the date of investment on the “gross assets” a company can have – from £200,000 to £350,000.
The age limit that applies to the definition of a company’s “new qualifying trade” at the date of investment - from 2 years to 3 years
The annual limits that apply to the investment amount on which individuals can claim income tax and CGT re-investment reliefs - from £100,000 to £200,000

The measure will have effect from 6 April 2023.

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