UK Spring Budget 2023 – the pensions lifetime allowance is abolished

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UK budget - Jeremy Hunt with red budget case

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The surprise announcement that the UK pensions lifetime allowance is being abolished was welcome news for those with larger pensions savings… but how long will it last and should you seek specialist advice now?

Tackling economic inactivity was a key principle in the Chancellor’s budget. Aside from an extension to the Energy Price Guarantee (EPG) until June, and the autumn statement tax freezes remaining in place, the significant news was surrounding pensions.

The predicted rise from £40,000 to £60,000 in the annual tax-free allowance that workers can save in pension pots has now been confirmed. The real surprise, however, was the scrapping of the lifetime allowance (LTA).

The pensions lifetime allowance – LTA

Your lifetime allowance is the amount you can hold in combined UK pension benefits pensions before incurring additional tax charges. First introduced by Gordan Brown in 2006 to bring in more tax from society’s wealthiest, the LTA arguably disincentivised pension saving. The allowance has reduced significantly in recent years, dropping by almost £800,000 between 2012 and 2022.

While the cap has been commonly viewed as a ‘tax on the rich’, it had unintended consequences for anyone receiving generous final salary pension schemes, such as senior employees of the NHS. Combined with the effects of the tapered annual allowance, a senior consultant or doctor, as an example, could find themselves in a position where tax charges became a deterrent for continuing to work, or could even exceed the amount they would be paid for overtime or shift work.

The Chancellor is almost certainly hoping that the decision to abolish the LTA will help retain the senior workforce within the NHS and even tempt some to return, stating that the changes will prevent 15,000 highly paid workers from retiring early.

What do these changes to pensions mean?

With the lifetime allowance in place, anyone whose pension funds amount or grow to over £1,073,100 (unprotected LTA) over a lifetime (excluding a state pension), would have to pay additional tax of 55% when taken as a lump sum or 25% for income or an overseas transfer. As of 6 April 2023, however, the LTA tax rate will effectively reduce to zero before being scrapped entirely in the 2024 Finance Bill.

Other pension changes effective from 6 April 2023 include:

  • An increase to both the Money Purchase Annual Allowance and the minimum Tapered Annual Allowance from £4,000 to £10,000.
  • An increase to the Annual Allowance for pension contributions from £40,000 to £60,000. Individuals will continue to be able to carry forward unused Annual Allowances from the three previous tax years.
  • The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000.
  • The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen for those without protections thereafter.

Why there may be a 16-month window for many to act?

For many people who have pension funds above £1 million (or who are likely to swiftly exceed this level), there may be options to transfer to a suitable alternative pension scheme depending on their personal situation. But it is worth seeking specialist, regulated advice to look at your specific situation now, as such a move is likely to take several months – and the clock is ticking towards the next UK general election, which may well see things change radically.

Following the Chancellor’s budget, the Labour Party has pledged to reverse the abolition of the lifetime allowance, labelling it a “Tory tax cut for the rich”, with Shadow Chancellor Rachel Reeves stating the move was “the wrong priority, at the wrong time, for the wrong people”.

She went on to say:

“The budget was a chance for the government to unlock Britain’s promise and potential. But the only surprise was a £1bn pensions bung for the one per cent, a move that will widen the cost of living chasm.… At a time when families across the country face rising bills, higher costs and frozen wages, this gilded giveaway is the wrong priority.… That’s why a Labour government will reverse this move [emphasis added]. We urge the chancellor and the Conservative government to think again too.”

The next UK general election must be held no later than 24 January 2025, and recent poll numbers suggest that Labour could very well form the next UK government.

The reinstatement of the lifetime allowance on pensions is certainly not guaranteed, but given that senior members of a political party that could win the next election have made a definitive statement that could easily belong to an election manifesto, the possibility should not be ignored.

If we assume a reversal would take effect immediately after a change in government and allow for six months for the transfer of a typical pension fund, the process of taking advice should be underway by July 2024 – which from April is a period of just 16 months. So the need for specialist advice is urgent if you are likely to be impacted.

Amongst other tax changes announced…

Income tax

The starting rate for savings will be frozen at £5,000, enabling individuals with less than £17,570 in employment income to receive up to £5,000 of savings income free of tax. Annual subscription limits for Junior Individual Savings Accounts (ISA) and Child Trust Fund accounts will remain at £9,000 and the annual subscription limit for adult ISAs will remain at £20,000.

To simplify administration, the government will formalise and extend an existing income tax concession for low-income trusts and estates. Additionally, calculations and reporting will become more straightforward.

HMRC also intends to make changes to inheritance tax regulations to remove non-taxpaying trusts from reporting requirements.

The various income tax allowances and the National Insurance contributions thresholds will remain frozen until April 2028, and the additional rate threshold will be reduced to £125,140.

Inheritance tax

The government will restrict the scope of agricultural property relief and woodlands relief from inheritance tax to property in the UK from 6 April 2024. Further details are still to be announced.

Both the general inheritance tax nil rate band of £325,000 (which has been at the same level since 2009) and the residential nil rate band of £175,000 will remain frozen until 2028, which will result in more families paying more tax over the period.

Frozen tax thresholds from the autumn 2022 statement

While other tax rates may not have risen since the autumn statement in 2022, freezing allowances has a similar effect – and is often referred to as ‘taxation by stealth’. Other measures taken in the autumn of last year to increase tax revenue by April 2024 include:

  • A cut to the capital gains tax exemption threshold from £12,300 to £6,000 and then to £3,000 in the 2023/24 and 2024/25 tax years respectively.
  • The dividend allowance, will decrease from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.

Make the most of a positive regime

To ensure you are best placed to benefit fully from any positive regime being introduced, it’s important to take personalised financial advice.

Blevins Franks has been helping our clients for more than 45 years. We have a team of  pension and tax specialists who support our advisers living locally to ensure you make the most of your pensions in the most tax-efficient way possible while living abroad.  We are regulated to provide UK pensions advice to EU residents.

Contact us today.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.