Mr Hunt’s first (full) effort was interesting, with some positive surprises and little in the way of negatives. The ambition was considerable, but most of the measures were modest, with little hope of achieving significant results. This Note focuses on the financial planning aspects, but a couple of general comments may help to set the scene.
The Chancellor seems to have two main targets:
“Back to work” measures. Perhaps the most important of these is the significant expansion of state help with childcare for children from age 9 months up to age four, which could bring a significant number of “economically inactive” parents back into work but has no financial planning implications except where income is just over £100,000. The other, for the other end of the working age range, is the package of changes to the pensions regime set out below.
Growth measures. There is no major initiative here but a collection of modest steps to boost business investment etc. which are collectively underwhelming. His scope is, of course, constrained by the overall economic situation, both here and abroad, but ambition seems lacking. There is little of relevance to this Note.
Changes to Pensions
- The headline is, of course, the unexpected abolition of the Lifetime Allowance (LTA) charge applying when pensions are drawn or at age 75. This has been a major problem for many as the level at which it applies has been gradually reduced to the current £1,073,100. This has been expensive for those with substantial, if not huge, funds and will still hit anyone reaching age 75 this tax year. It must also be noted that the Labour party, expected to be the government in two years’ time, has already announced its intention to reverse this change, so the window of opportunity may be short.
- The sting in the tail is that the maximum tax-free cash limit (for those without some form of Pension Protection) remains at 25% of the current LTA limit permanently, the first such tax-free cash restriction which could be a harbinger of further restrictions in the future.
- There are also less dramatic changes to the annual contribution limits, which are relatively more important without an overall LTA limit. The Annual Allowance goes up from £40,000 to £60,000, with the adjusted income threshold for tapering also increased to start at £260,000. The limit for people earning over £380,000 from the next tax year has increased from £4,000 to £10,000.
- From the “back to work” point of view, the amount that can be contributed from continued earnings after drawing a pension, the money purchase annual allowance, goes up to £10,000 from £4,000.
Non-pension changes
There is very little of relevance here; all the main thresholds will reduce or remain unchanged as previously announced, becoming about 10% more restrictive due to inflation.
Reminder of upcoming changes from last budget update
Capital Gains Tax (CGT)
Currently the first £12,300 of gains realised each year are tax free. From April 6th this allowance will drop to £6,000 and fall again to £3,000 in April 2024. From a planning perspective it may be helpful to realise gains to use the current year allowance before 5th April. CGT is taxed at 10%/20% for investments or 18%/28% on residential property.
Dividend Tax Threshold Reductions
Currently the first £2,000 of dividend income received each year is tax free. From the 6th April this allowance will fall to £1000 and just £500 from April 2024. Making use of ISA allowances and dividing investments between spouses to optimise tax is worth considering. For tax purposes dividends are added to income from other sources but taxed at rates that relate to the normal income tax bands:
| Income Tax Band | Income Band | Dividend Tax Rate |
| Dividend Allowance | £0 – £2,000* | Tax free* |
| Income tax Personal Allowance | £0 – £12,570 | Tax Free |
| Basic Rate Band | £12,570 – £50k | 8.75% |
| Higher Rate Band | £50k – £125k | 33.75% |
| Additional Tax Band | £125k+ | 39.35% |
| *Reducing to £1k April 2023, £500 in April 2024 | ||
Tax Incentivised Investments
Not in the Budget, but announced yesterday, there were some changes to the provisions governing EIS, SEIS and VCT schemes. The most important of these is the reiteration of the government’s support for them generally through the removal of the “sunset clause”, by which they were to come to an end in 2025, an EU-imposed requirement. The limits on SEIS, both as to maximum individual investment and company size, have been raised.
To view a more detailed commentary click here.
If there are any matters you would like to discuss in relation to the Budget, or any aspect of your financial planning, then please do not hesitate to get in touch.
This note is intended as a summary only and should not be regarded as a specific or personal recommendation. The Financial Conduct Authority does not regulate tax advice.
All measures remain potentially subject to change until enacted into legislation.