During his 2023 Spring Budget speech yesterday, Jeremy Hunt announced that the Office for Budget Responsibility are now forecasting that the UK will narrowly escape a recession this year. This was met with cheers from backbenchers, which reflects quite how low expectations have fallen – economic growth is still expected to decline by 0.2% across 2023, despite technically avoiding a recession (two consecutive quarters of decline). There are reasons to be optimistic, however, not least from the prospect of inflation falling to 2.9% by the close of the year. A return to more moderate levels of inflation – both in the UK and globally – would provide a boost for investors and much needed relief for households.
Let’s not forget this differs greatly with the Bank of England so I’m certainly in the camp of it will fall this year, and at a quicker pace from June onwards, but it feels very optimistic and this view also relates to the US, where the base case is higher than target inflation for longer.
Most major policy announcements were split into a few areas: supporting enterprise, employment & education, and making sure that benefits were felt everywhere in the UK.
Enterprise. Policies focussed on removing barriers to investment and making the UK a more productive, attractive, and competitive market.
- A new policy of full capital expensing, to allow certain investments to be fully written off against taxable income, worth £9bn per annum for three years. Replaces the super-deduction system.
- Enhanced or extended tax relief for certain R&D, and for the creative and cultural sectors.
- A lighter regulatory touch resulting in faster approvals for new medicines and healthcare.
- Significant long-term funding for artificial intelligence and quantum computing, and an easier regulatory environment for tech companies to innovate in.
Employment & education. Policies focussed on reducing barriers to work, particularly for older citizens and women.
- Abolishment of the Lifetime Allowance Charge for pensions and an increase in the annual allowance from £40k to £60k.
- By 2025, 30 hours per week of free pre-school childcare for working parents.
- Funding additional after-hours wraparound childcare within schools and from childminders.
- Apprenticeships and support schemes to increase employment of the over-50s.
- Reform to disability benefits to remove disincentives to work whilst retaining benefits.
Everywhere. Policies to reduce geographical disparities, especially London vs elsewhere.
- 12 new regional Investment Zones, with funding worth up to £80m each.
- More devolution of power to local leaders, starting with Greater Manchester and the West Midlands.
- There were also policies to fund regional regeneration projects, fix road potholes, improve leisure facilities, and fund charity and community organisations around the UK.
Some other policies of note were focussed around:
- Reducing the impact of inflation for households, such as by an extension to the 5p cut in fuel duty, more draught relief for beer in pubs, an extension of the Energy Price Guarantee to June 2023, and rules to remove unfairness around energy prepayment meters.
- Defence. Increase in defence and national security spending and veteran support.
- Energy. Supporting new nuclear power development and carbon capture technologies.
LIFETIME ALLOWANCE (LTA)
The biggest surprise yesterday in the Budget; it has been confirmed that the Lifetime Allowance (LTA) charge will be removed for the 2023/24 tax year. This will then be abolished from April 2024 in a future Finance Bill.
Additionally Pension Commencement Lump Sum (tax-free cash) which for most has been capped at the lower of 25% of the fund value or 25% of their available LTA at the time this sum is taken will change. This measure will set a PCLS upper monetary cap of £268,275 (25% of the current LTA) and will be frozen at this amount. However, those individuals who already have a protected right to take a higher PCLS will continue be able to do so.
Further to this, where LTA excesses were paid as lump sums, they were subject to a standalone 55% tax charge. From 6 April 2023 this measure ensures that, in such cases, these lump sums are instead taxed at an individual’s marginal rate of income tax.
The devil will be in the detail of the Spring Finance Act on the LTA charge change and the future Finance Act that will deal with the LTA abolition. Clarification will be needed for those with scheme specific tax-free cash along with details on those with enhanced or fixed protection as to whether or not they can start contributing to pensions again given there is still technically a LTA for 2023/24.
There are certainly planning opportunities here. There is absolutely a benefit for sure, of crystallising an entire fund before the next general election, as this will save thousands, and hundreds of thousands of pounds of tax for some.
Whilst I welcome this news, the Shadow Chancellor has already stated Labour would remove this policy; I’ve never seen this reaction to a tax policy so quickly after it was announced, so careful planning is likely to be needed to make use of these advantages; as they may not be around for too long, judging by the polls.
ANNUAL ALLOWANCES (AA)
This will increase the pensions annual tax-free allowance by 50% from £40,000 to £60,000 and will be available from 2023/24. The increase in these allowances for those with career average schemes may be increased in times of high inflation. Increasing the AA will also limit those facing AA excesses that cannot be mitigate by carry forward.
For those in defined contribution schemes this will give them a higher value of total pension contributions that can go into pensions from them, their employers or a third party paying on their behalf. With the corporation tax changes coming in from 2023/24 this may make pension contributions even more attractive for those companies that will be paying higher corporation tax rates.
The Money Purchase Annual Allowance (MPAA), applied to those who flexibly access their pension, will be restored to £10,000, the level it was originally set at. Finally, the Tapered Annual Allowance (TAA) will rise to £10,000, with the adjusted income threshold for the TAA also rising to £260,000.
This is good news for the higher earners that have been in the tapered annual allowance trap. Presently from adjusted income of £300,002 individuals would have less than £10,000 of AA left due to tapering and would reach the minimum taper of £4,000 at £312,000 of adjusted income (assuming they are also above the threshold income limit of £200,000 (which is not changing)).
From 6 April 2023 those with adjusted income of £360,000 will be at the minimum tapered level. This may mean there is more scope for pension contributions for next tax year for higher earners that have adjusted income above £240,000.
Carry forward for pensions remain.
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. Also worthy of note is that the Personal Savings Allowance (PSA) for 2023/24 remain at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
Changes to capital gains and dividends remain as announced previously.