2023 Budget Analysis
A Budget for Growth: The changes and what they mean for financial planning strategy
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 to consider in the immediate prebudget period and most of them happened.
Here are some of what we consider to be the highlights:
- Changes to the annual limits on tax relieved pensions savings, giving greater scope for many to save.
- Lifetime allowance charge being removed from next tax year on funds designated to income in excess of the lifetime allowance. Funds drawn as a lump sum in excess of the lifetime allowance will be chargeable to income tax.
- Lifetime allowance abolished in 2024.
- Removal of Lifetime Allowance charges next tax year before 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 will 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.
- Twelve 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 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, inheritance tax not to investment taxation.
Let us consider four key areas of financial planning
The change to the contributions allowance from April 2023 will 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 assigned 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 .
Existing lifetime allowance protections may still be relevant as they will offer higher protected tax-free cash amounts. However, those who hold a valid enhanced protection or any of the fixed protections, will be able to accrue new pension benefits after 5 April 2023, and join new arrangements without losing their protection, provided the protection was applied for before 15 March 2023. No contributions should therefore be made this tax-year in this circumstance as the loss of any unused carry forward from tax year 19/20 is unlikely to outweigh the retention of the higher tax-free cash at the future point of crystallisation.
Additional restrictions are being applied from April 2024 with regards 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.
These are material changes, and it remains to be seen as to whether they will achieve their objective of getting more older people (especially Doctors) out of retirement and back to work and being sufficient incentive for those not yet retired (but considering it) to stay in work.
Most financial planners will be awaiting the detail in the legislation and confirmation that the changes pass into law before advising their clients to act based on the proposed changes.
There is also the concern in relation to what a future Labour government might do in relation to these changes (given the observations made by the Shadow Chancellor immediately after the Budget) if they are returned to power in the next election- expected in 2024, though the latest time the election could be is late January 2025.
This is a “space” most definitely to be watched very carefully as things develop.
Other savings and investments
Little was announced in the Budget to affect tax planning decisions in relation to non-pension investments. However, the many frozen allowances and thresholds, the reduction in the threshold above which the 45% additional rate of tax is payable, the reduction of the tax-free dividend allowance from £2,000 to £1,000, 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 .
It was also confirmed that the ISA, Junior ISA, and Savings Income allowances would all be frozen in the 2023/24 tax year. For many this represents positive news, as the allowances are not being reduced.
Maximising the amount that can be passed on to the next generation is a key objective of many. Given that, inheritance tax stability is 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 means 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. As stated above 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, exemptions, and reliefs you are entitled to is more important than ever. Why not consider offering your clients a tax health check to screen for tax inefficiencies?