Personal Finance | 17 March 2023
SPRING BUDGET: THE IMPACT ON PENSIONS AND PASSING ON WEALTH
Sweeping pension changes announced by the government in the recent Budget could have implications for inheritance tax planning.
Chancellor Jeremy Hunt made some significant changes to pension rules in his 2023 Spring Budget.
He is scrapping the lifetime allowance – the limit on how much someone can generally put aside in pension savings before they have to pay a lifetime allowance charge. The current limit, £1,073,100, was set to be in place until 2026, but the allowance will be fully abolished from April 2024.
Mr Hunt also extended the annual pension allowance – the most someone can pay into a pension in any given tax year without a penalty. It’s set to go up by 50%, to £60,000 from £40,000. However, high earners will have their allowance tapered down, depending on how much they earn, to a minimum of £10,000. As always, it’s worth seeking independent tax advice to understand your position.
The changes are primarily designed to encourage older doctors with defined benefit pension schemes to stay in or return to work, as they may otherwise incur lifetime allowance charges. The Chancellor told MPs during his Budget speech that “no one should be pushed out of the workforce for tax reasons”.
The maximum, non-protected amount you can take out of your pension tax free when you reach minimum pension age as a one-off lump sum remains 25%, but it will now be capped at £268,275.
Inheritance Tax planning implications
Irene Wolstenholme, tax specialist at Coutts, explains that the lifting of the lifetime pension allowance could have positive implications for inheritance tax planning.
She says, “If you pass away before you draw your pension, under certain conditions it can pass to your dependents without incurring inheritance tax. So the government lifting the limit on how much you can put into your pension without paying additional tax could be an efficient way to pass your money on to your loved ones.”
But she adds, “The detail around the legislation needed for these changes is not yet clear, and will still be debated within Parliament. Also, if you die after 75, there may be income tax consequences for your beneficiaries to consider, who would normally be taxed at their marginal rate of tax.”
Corporation tax changes
The main rate of corporation tax will increase to 25% from 19%, as expected, from April this year.
There is some positive news for businesses as well though. The Chancellor announced a new policy of “full expensing” for three years – with a view to making it permanent. It means that a business’s expenditure on IT equipment, plant or machinery can be deducted from its taxable profits.
The Office for Budget Responsibility says this will increase business investment by 3% every year it’s in place.
Big changes from previous Budget still ones to watch
Irene says that, pension allowance developments aside, significant changes for wealthy individuals also came in the Autumn Budget last November.
“The government’s dividend and capital gains allowance cuts, announced last year and coming into effect soon, remain worth keeping in mind,” she says.
Those cuts are:
- The amount of dividends you receive from investments that are tax-free has been halved for the upcoming tax year (2023-24) – down to £1,000 from £2,000 – and will fall further to £500 for the 2024-25 tax year.
- The threshold for paying capital gains tax will more than halve for the 2023-24 tax year – to £6,000 from £12,300, and will drop again to £3,000 the following tax year. Capital gains tax is a tax on the profit you make when you sell or dispose of something that’s increased in value, such as property or stocks.
We're here to help, but please be aware that we cannot offer any tax advice. We recommend you contact an independent tax advisor to discuss your personal tax situation.
Any current tax reliefs referred to are those applying under current legislation which may change. The availability and value of any tax reliefs will depend on your individual circumstances.