In the days leading up to the Budget, the general expectation was that the primary focus of the Chancellor would be on encouraging long-term sustainable growth and continuing economic support for those that needed it, especially in relation to energy costs, while maintaining financial stability.
There were many solid rumours in the days leading up to the Budget and most of them came to pass.
Here are some of the highlights from the announcement:
- Changes to the annual limits on tax relieved pensions savings, giving greater scope for many to save
- Removal of Lifetime Allowance charges next tax year before the abolition of the Lifetime Allowance from April 2024
- The gradual extension of free childcare of up to 30 hours per week for children up to age 3 starting in April 2024 and fully implemented by September 2025
- Various employment incentives, including for the disabled and over 50s
- The ISA investment limit and the 0% starting rate band for savings income to remain at their current levels of £20,000 and £5,000 respectively
- New and continuing incentives for businesses investing in qualifying capital equipment and including most office machinery and I.T equipment allowing 100% of the expenditure to be fully deductible for tax purposes. The scheduled increases to corporation tax from 1st April 2023 will however proceed
- 12 new investment zones to be designated subject to successful application. These would qualify for a range of incentives, support and tax reliefs
- An extension of the energy support guarantee at the current level of £2,500 for an average household for a further three months until July 2023
So, what does all of that mean for financial planning strategy? Especially given that there were no material changes announced in relation to the main personal taxes, namely income tax, capital gains tax and inheritance tax.
Let’s consider four key areas of financial planning:
The change to the contributions allowance from April 2023 will generally mean that those saving into pensions will have the option to increase their current amounts, if financially viable. This also means that the additional benefits of paying into a pension, such as restoring the personal allowance or reducing the top rate of tax paid, is further extended.
The first change is an increase of the annual allowance for tax relieved pension contributions from £40,000-£60,000 per annum. This flows through to those that were limited by the tapered annual allowance to mean that even high earners will be able to contribute that bit more, with the minimum tapered amount being increased from £4,000 to £10,000.
In addition, the money purchase annual allowance (the maximum you can contribute to a defined contribution scheme each year having flexibly accessing income) is also increasing from £4,000 to £10,000.
The second part is in relation to the total tax relieved pension savings in your lifetime, which was previously limited to the Lifetime allowance, with anything over and above this being taxed. In the next tax year, the Lifetime Allowance charge will fall away, and the Lifetime Allowance will be abolished in April 2024.
Additional restrictions are being applied with regard to tax free cash, which will be limited to 25% of the current Lifetime Allowance (£268,275), although those with higher historic protections may be entitled to more.
Other savings and investments
While little was announced in the Budget to affect tax planning decisions in relation to non-pension investments, the many frozen allowances and thresholds and, from 6th April 2023, the reduction in the threshold above which the 45% additional rate of tax is payable, the reduction of the tax free dividend allowance from £2000 to £1000 and the reduction of the CGT exemption from £12,300 to £6,000, mean that building tax efficiency in your investments is even more important. Beyond pension investments, the protection from income tax and capital gains tax that the ISA gives and which, up to a (reduced) point, can also be given by unit trusts and other collective and direct investments, is essential to consider and, for some, the tax deferment and tax management capability of investment bonds can be worthy of consideration.
Maximising the amount that can be passed on to the next generation is a key objective of many. Given that, inheritance tax stability is generally welcomed. Understandably, strong focus is given to reducing inheritance tax when assets pass to other than a surviving spouse, civil partner, or charity. Although no changes to inheritance tax were announced, the fact that the nil rate bands (the up to £500,000 that can be left tax free) remain frozen mean that more will be affected by the tax. Planning to minimise this tax while, if required, retaining control over and even access to the amounts deployed in planning remain available. Providing for the tax through life insurance in trust should also be considered in the right circumstances.
And don’t forget successful “intergenerational planning” is strongly contributed to through lifetime tax efficiency, including investing specifically for children through junior ISAs. No changes were proposed to the £9,000 per annum limit for these highly tax efficient investments.
Planning for business owners
With the planned increase to corporation tax (from 19% to 25%) on profits over £50,000 going ahead from 1st April, the reduction to the dividend allowance and, for those affected, the reduction in the additional rate tax threshold, together with the raising of the pension limits, it will be important to review “benefit extraction” strategies. In other words, the relative merits of dividends, salary/bonus and pension contributions.
Business owners looking to grow their businesses will also need to give serious thought to the new capital investment incentive termed “full expensing”, which offers 100% first-year relief (full deduction from taxable profits) to companies on qualifying new main rate plant and machinery investments from 1 April 2023 until 31 March 2026.
All businesses, incorporated or not, will continue to have access to the Annual Investment Allowance providing 100% first-year relief for plant and machinery investments up to £1 million.
The financial and non-financial value of advice remains integral to achieving your goals and ambitions. Especially as we head towards the end of the tax year and the start of the next taking full advantage of the allowances, exemption, and reliefs you are entitled to is more important than ever. Why not ask your adviser for a Tax Health Check to screen for tax inefficiencies?
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
SJP Approved 15/03/2023