Autumn Statement 2023

National Insurance changes

The Chancellor announced that Class 2 NICs are to be “abolished” for the self-employed who have profits in excess of £12,570. He also announced that the main rate for Class 4 NICs will be reduced from 9% to 8% and that the main rate for Class 1 NICs will come down from 12% to 10%.

Further detail was given on National Insurance in the Autumn Statement documentation. The government will freeze the Lower Earnings Limit (LEL) and the Small Profits Threshold (SPT) at 2023/24 levels in 2024/25. For those paying voluntarily, the government will also freeze Class 2 and Class 3 National Insurance contribution (NIC) rates at their 2023/24 levels in 2024/25. The LEL will remain at £6,396 per annum (£123 per week) and the SPT will remain at £6,725 per annum. The main Class 2 rate will remain at £3.45 per week, and the Class 3 rate will remain at £17.45 per week.

In simple terms, a reduction in National Insurance and a freeze on the thresholds means more money in the pocket for workers. The Chancellor has announced changes to Class 1, Class 2, and Class 4 contributions which will benefit both employees and the self-employed. Class 3 NICs are unaffected. While the changes for Class 2 and Class 4 NICs take effect from 6 April 2024, the reduced rate applicable to Class 1 NICs will be effective from 6 January 2024.

Employees

Currently, employees pay Class 1 NICs at the main rate of 12% for earnings between £12,570 and £50,270. The Chancellor has announced that the main rate will be reduced to 10% from the 6 January 2024 which over the course of a year will save up to £754 p.a. for those who have earnings up to the higher rate threshold.

On the flip side, the lower rate will result in a lower saving for basic rate taxpayers making use of salary sacrifice. Previously, an individual earning £50,000 p.a. who sacrificed £10,000 of their salary into a pension would have saved £1,200 in National Insurance. With the reduced rate, this NI saving reduces to £1,000. Although the savings will reduce, salary sacrifice remains an attractive planning option when it comes to making pension contributions. 

Self employed

The current rules for Class 2 NICs depend on the level of profits the self-employed individual has:

• Profits over £12,570 - Class 2 NICs are mandatory and are paid at a flat rate of £3.45 per week.
• Profits between £6,725 and £12,570 – No Class 2 NICs have to be paid but credit is still given towards contributory based state benefits e.g. state pension
• Profits below £6,725 – There is no requirement to pay Class 2 NICs but contributions can be paid on a voluntary basis to build up entitlement to benefits and state pension.

From 6 April 2024, for those with profits above £12,570 will no longer be required to pay Class 2 NICs. This will not impact their right to state benefits and given the rate was planned to increase to £3.70 next year, this represents a saving of up to £192 over a year.  

Those with profits under the Small Profits Threshold of £6,725 can continue to pay Class 2 NICs to build entitlement to state benefits and it’s been confirmed the current rate of £3.45 per week will remain for the 2024/25 tax year.

The government have also said they will set out next steps in reforming Class 2 NICs next year so it appears this is not the end of the changes.

In addition, from 6 April 2024 the main rate for Class 4 NICs applicable to profits between £12,570 and £50,270 will drop from 9% to 8%.

The combined impact of reduction in NICs for the self employed is estimated to save £350 p.a. for the average self-employed person with profits of £28,200 p.a in 2024/25.

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) extensions

The government will legislate in the Autumn Finance Bill 2023 to extend the existing sunset clauses for the EIS and VCT from 6 April 2025 to 6 April 2035.

For clients investing in the EIS and VCTs, then it’s good news that the expiry date will be extended beyond 2025 as recommended by the House of Commons Treasury Committee. Income tax relief at 30% is available for investment into the EIS and VCTs and 50% into SEIS. Subscription limits apply. Other tax advantages are also available.

ISA Changes

In Chapter 5 of the big green book, there were several ISA announcements.

1. The government will allow multiple subscriptions to ISAs of the same type every year from April 2024.
2. The government will allow partial transfers of ISA funds in-year between providers from April 2024.
3. The government will remove the requirement to reapply for an existing dormant ISA from April 2024.
4. The government will allow Long-Term Asset Funds to be permitted investments in the Innovative Finance ISA from April 2024.
5. The government will allow open-ended property funds with extended notice periods to be permitted investments in the Innovative Finance ISA from April 2024.
6. The government intends to permit certain fractional shares contracts as eligible ISA investments and will engage with stakeholders on implementation.
7. The government is announcing the digitalisation of the ISA reporting system to enable the development of digital tools to support investors.
8. The government will harmonise the account opening age for any adult ISAs to 18 from April 2024.

In the main, more flexibility. Many policy papers were published after the Chancellor sat down but none dealt with the ISA changes. More information will no doubt be available in due course.

With regard to subscription limits for 2024/25 it’s steady as she goes. The government is freezing the ISA at £20,000, Junior ISA at £9,000, Lifetime ISA at £4,000 (excluding government bonus) and Child Trust Fund at £9,000.

Rates, Bands and Allowances

Slightly under the radar, the government published what it calls OOTLAR (Overview of tax legislation and rates) with Annex A providing tables of tax rates and allowances for 2023/24 and 2024/25.

This document suggests that rates, bands and allowances will be largely frozen as we move from 2023/24 to 2024/25. You can read these at your leisure. Annex A - rates and allowances - GOV.UK (www.gov.uk)

The question is, will any of these figures be changed in the Spring Budget 2024. For example, when he was Chancellor, Rishi Sunak announced plans for a 1p cut to income tax from 2024. We can only wait and see.

Pensions

Draft legislation was published on 18 July 2023 regarding the abolition of the LTA. There were still a number of points of detail that have been outstanding from that draft. Further information was published on 22 November 2023 to clarify these points.

There will be more information/further draft legislation in the Autumn Finance Bill 2023, but below is a summary of what has been announced.

The biggest unknown since the July draft was published was what would happen to death benefits taken as income (beneficiaries drawdown/annuity) for those that die pre-75, as the original draft focused on lump sums. The tax treatment of income death benefits for those who die after 75 will remain as taxed at the recipient's marginal rate of tax if paid to an individual, and 45% if paid to a non-qualifying individual such as a trust or estate.

The issue was further confused by an associated policy note in July that stated: “Individuals will still be able to receive the benefits which are currently tested against the LTA at BCEs 5C and 5D, but the values will no longer be excluded from marginal rate income tax under ITEPA, with effect from 6 April 2024.”. HMRC quickly clarified that no decision on this had actually been taken and this was being worked through.

However, in the further information it was clarified stating “Following consultation, the government can confirm individuals will still be able to receive the benefits that are currently tested against the LTA under BCEs 5C and 5D.  Their values will continue to be excluded from income tax, maintaining the current treatment.”.

To clarify this applies where the benefits are settled within two years of the scheme becoming aware of the members death.

But good news on this subject for individuals is that this tax free treatment will continue. But knowing what the scheme can offer a beneficiary is extremely important. If a scheme cannot offer beneficiaries an income they will have to pay benefits as a lump sum, so if over the available Lump Sum Death Benefits Allowance (LSDBA) there will be tax implications for the recipient.

It is also worth making sure that nominations are up to date so that the scheme can offer beneficiaries income.

A big point of detail that needed clarification was what would happen to pensions transferred to QROPS in the new regime. Presently these are tested against the LTA at the point of transfer. Historically any LTA excess transferred to a QROPS is taxed at 25%. For the current tax year there is no restriction as the LTA excess charges have been set to 0%. Which left the big question, how will this work in the new regime where the main test is on what lump sums have been paid out?

Further to the Lump Sum Allowance (LSA) and LSDBA we will now have a third Allowance, namely the Overseas Transfer Allowance. This will cover what happens to transfers to a QROPS. The value of this is going to be equivalent to your lump sum and death benefit allowance (£1,073,100). Any transfers above this amount will be subject to the overseas transfer charge of 25% (which can already apply to certain overseas transfers).

What we don’t presently know is how this will interact with the other allowances. Will taking a lump sum from the receiving QROPS use up LSA? If the transfer is at, or above the value of the LSDBA will that use this up? If not does that open things up for pension savers to get two bites at the cherry?

The detail will hopefully be in the draft legislation.

A big unknown in the previous draft legislation was what would happen for income benefits taken between 2006 and 2024. Under the LTA regime these would have been tested when scheme pensions, annuities or designation to drawdown occurred. With the new regime focusing on lump sums to test against new allowances would these have an effect on the LSA or Lump Sum and Death Benefit Allowance?

The policy paper has now given us some indication of what will happen, with further detail expected in the Bill to follow.

It has been stated that where an individual has previously used 100% of their LTA, they will have exhausted their allowances and the transitional calculation will not apply.

For those that have not used 100% of the LTA then a transitional calculation can apply which will account for benefits taken before 6 April 2024. A transitional calculation will be provided so that individuals can calculate their available LSA and LSDBA.

A new method is provided to calculate an individual’s remaining available allowances where they had an actual, but not a prospective, right to an existing pension on 5 April 2006. This will cover a potential issue around those that had pensions in payment prior to the LTA regime. Although we presently have no detail on how this calculation will apply to a members LSDBA.

Members with complete and accurate records of the previous tax-free amounts they have received will have opportunity to provide these records to their scheme for an alternative transitional calculation.

To facilitate the transition from the LTA regime to the new allowances, the Treasury will have the power, if needed, to make additional necessary primary legislative changes via statutory instrument. This power will only have effect until 5 April 2026.

We will await further details on this to see how this calculation will apply and what this will mean for those with limited LTA remaining that have not taken this “full” entitlement to PCLS.

In the original draft legislation in July there was no detail on how Lifetime Allowance Enhancement Factors (LAEF) will or would be included. LTA protections carried over to the new regime, so it seemed an issue that these would not.

It was been announced on 22 November that these will now be included, although we will need to see further detail in the Autumn Finance Bill 2023 to see exactly how these will work. But the government have stated that these will ensure that these will ensure;

• individuals with an LTA enhancement based on pre-commencement rights to pension credits retain their rights to a higher level of tax-free lump sum, and to higher tax-free parts of SIHLS and lump sum death benefits.
• individuals with any other LTA enhancement factor retain their rights to higher tax-free parts of SIHLS and lump sum death benefits where they became entitled to this enhancement factor before 6 April 2024.

It’s worth noting that for these to apply the individuals have to become entitled to apply for a LAEF before 6 April 2024 and apply for this prior to 6 April 2025.

As drafted in July both of these lump sums would have used up LSA and LSDBA. Under the LTA regime these were never tested, the policy note issued on 22 November has confirmed that this will be the case in the new regime.

In the July draft there was a lack of clarity around Stand Alone Lump Sums (SALS) where the member had the right to take all of their pension tax free was altered last year. The maximum tax free amount that could be paid was the value of the pension as at 5 April 2023, with any excess taxed at marginal rates. This treatment will carry over to the new regime.

However, it wasn’t clear how the amount taken from this would ultimately work as the tax free amount from a SALS would use LSDBA but would not use any LSA. This appears to now be clarified for most in the policy note, but it does state for those with Primary or Enhanced Protection the tax free amount of a SALS will reduce the LSA and LSDBA, but only by 25% of the total value paid out (the SALS value as at 5 April 2023 plus any growth above that subject to income tax).

This applies for those that had an entitlement to tax free cash prior to 6 April 2006 that was greater than 25% but less than 100% (which would be a SALS). The method for revaluing the current value of the PCLS had been detailed in the previous draft. But we did not have clarity as to how this would translate to the new regime.

The specific issue being that under the LTA regime as long as the total value of the uncrystallised fund was below the LTA you could pay the protected Lump sum if this was above 25% of the remaining LTA. As this would be a PCLS payment this would use up LSA in the new regime, so potentially a mismatch from the present rules.

The policy note has clarified that for these pension the total deduction to the LSA will not be the full value of the PCLS, but it will be reduced by 25% of the lump sum and arising pension (the total fund crystallised in LTA terms).

Autumn Statement Pensions Reform by 2030

At Autumn Statement the government has announced a comprehensive package of pension reform intended to provide better outcomes for savers, drive a more consolidated pensions market and enable pension funds to invest in a diverse portfolio. These measures represent the next steps of the Chancellor’s Mansion House reforms and meet the 3 golden rules:

• to secure the best possible outcomes for pension savers
• to prioritise a strong and diversified gilt market
• to strengthen the UK’s competitive position as a leading financial centre

The package sits alongside the government’s comprehensive capital market reforms, to boost the attractiveness of markets, and make the UK the best place to start, grow and list a company.

There are a number of consultations with a focus on driving better outcomes and below are three consultations which will be of interest for advisers.

1. Call for Evidence on Lifetime Provider Model and small pots consultation response

The government is launching a call for evidence on a lifetime provider model to simplify the pensions market by allowing individuals to move towards having one pension pot for life, and on a potential expanded role for collective defined contribution (CDC) schemes in future. By creating an environment for collective defined contribution schemes, which broadly aim to provide a target level of benefits to each member.

The government will also introduce the multiple default consolidator model to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000. Based on the provided data this would include 12.1 million pension pots with total value of £4.2bn (making the average value slightly over £347). Consolidating these should potentially provide improved value for money and therefore better net benefits for members.

2. Update on saver choices at retirement

The government is publishing an update that proposes placing duties on occupational pensions trustees to offer decumulation services and products at an appropriate quality and price when savers access their pension assets, either themselves or through a partnership arrangement. It also sets out the intention to further explore the development and wider use of Collective

In relation to the above two consultations, Paul Maynard MP, Minister for Pensions, has commented:

These options build on the current package of reforms, including the multiemployer CDC schemes, the small pots solution, the Value for Money Framework, and the development of decumulation products. Both these measures could improve the opportunity for investment in productive finance assets, given the potential for longer investment horizons, supporting better member outcomes.

Nothing here is intended to change the current and medium-term development of the CDC and the decumulation products markets. We want these innovations to facilitate the delivery of potential long-term changes. We need to balance the needs of those approaching retirement today, and those still a long way off retirement. This is all part of the wider plan for pensions, which has pension savers at its heart.

3. Public consolidator for DB pension schemes

DWP will launch a consultation this winter on options for DB schemes, currently unserved by the market, to consolidate into a new statutory vehicle run by the Pension Protection Fund.

In respect of the above consultation, Laura Trott, MBE, MP, former Minister for Pensions has commented:

We want to offer sponsoring employers and scheme trustees more choices going forward. This could include more consolidation options or more choices in how they invest DB assets and help them to generate greater surpluses. However, the Government is acutely aware that changes to how this level of assets are invested can have considerable effects on the economy, both positive and negative, so we will need to go cautiously and understand the impact of any suggestions on the UK economy as a whole.

As well as ensuring pensions are protected, we must prioritise having a strong and diversified gilt market and our decisions must strengthen the UK’s competitive position as a leading financial centre.

We are keen to explore some of the ideas which suggest ways in which sponsoring employers and DB scheme trustees can invest differently, and the choices we could offer to help them to do this. Please consider responding to this call for evidence on whether there is scope to enable greater flexibility in how DB pension scheme assets are invested with the potential to work harder for members, employers and the economy.

The government’s pension reform consultations are part of a long-term agenda and will need all parts of the pensions delivery and regulator system to operate in alignment with this vision.

While there are many unknowns about how the reforms will impact clients from a planning perspective it’s clear consolidation of small pension pots and the creation of “one pot for life” pension arrangements will mean these will need to be reviewed by financial planners to achieve suitable outcomes for clients.

If employees choose to use the “one pot for life” option then it’s likely to change the advice considerations when it comes to Auto Enrolment (AE) as it might create an opportunity for members to have contributions paid to what is currently deemed a non-qualifying AE scheme.

A “one pot for life” arrangement may be welcomed by financial planners as it may be easier to manage a clients pension planning from a defined contribution perspective.

Those with defined benefit pension scheme arrangement might be impacted should the Consolidators approach or Pension Protection Fund ideas are implement and then subsequently adopted by their scheme.