Though a quiet Budget for financial services, changes to pension allowances will alter the calculation on personal finances for many, particularly given the earlier cuts to dividend and capital gains allowances. For business, the new investment zones are an interesting prospect, but the details have yet to be confirmed.
For a Budget focused on growth, there appeared to be precious little to excite the financial services industry as a whole. The confirmation that the 25% (28% for Banks) corporation tax rate would come into effect from 1 April 23 was expected, if still disappointing, but more so the lack of clarity on whether this higher rate would persist for the short, medium or long term. The Chancellor noted that the UK was falling behind its international competition by not offering sufficient incentives for businesses to invest in areas that align with the Government’s strategy, so what the Budget offered for financial services businesses wanting to invest and grow in the UK felt slim.
The changes to pensions will have been very welcome to some, of course. In particular, the removal of the lifetime allowance charge from April 2023 and the later abolition of the allowance itself, along with the increased annual allowance, should lead to an increase in money flowing into pensions. This is particularly the case as other allowances, for example capital gains and dividends, have been progressively cut in recent years. These changes are likely to shake up the competitive landscape for personal investments somewhat amongst those with sufficient earnings or money to invest, but will have limited impact outside that population. As ever with changes to pensions, some technical and operational wrinkles can be expected that may give some providers short-term headaches given the speed at which the changes are coming into effect, but this hopefully falls into a ‘nice problem to have’ category.
Another area that will be of interest to parts of the financial services market is the proposal to create 12 investment zones across all parts of the UK, which may provide some opportunity for funding and investment. The aspiration and ambition of the Government around levelling up is clear and overall compelling. The UK’s success in levelling up, and the UK financial services sector’s contribution in particular, may need to be notwithstanding tax policy rather than galvanised by it.
Finally, there were some specific points relevant to financial services in the Budget papers.
Ultimately, particularly given the volatility of the financial markets over the past week, a comparatively quiet, tactical and forward-looking Budget may be what was needed at this point in time, and bigger short-term wins for UK financial services may come through post-Brexit regulatory changes not tax policy.
12 investment zones will benefit from preferential fiscal tax incentives available over a five-year period as well as planning liberalisation and wider Government support, to boost development and growth.
Each zone will have access to funding of £80 million over a 5-year period. The tax incentives will be similar to those previously announced for Freeports, including:
The following locations have been proposed for the investment zones in England:
At least one investment zone is proposed in each of Scotland, Northern Ireland and Wales, with the locations still to be determined.
Shortlisted areas are invited to develop an investment zone proposal, in coalition with local authorities and partners.
Investment zones are not a new concept, and their success is often debatable. Most significant benefits have been observed where the zones build on existing strengths or infrastructure.
The 12 investment zones are a scaling down from the 38 previously announced and present a change in focus.
The proposed zones are likely to be close to existing leading universities and research institutes and are intended to drive growth in five key sectors: Life sciences, Creative industries, Digital technology, Advanced manufacturing and Green industries.
With stability and longevity of commitment being key factors in maximising investment value, the introduction of investment zones should help align public and private investment in such areas.
The Chancellor referenced Canary Wharf and Liverpool Docks as example success stories. The policy focus on existing institutes and specific sectors may help create centres of excellence, however, questions may remain on their ability to help drive long-term regeneration of other deprived areas; particularly with no zones located south of the Midlands.
Government expects funding to commence in the tax year 2024/25.
A substantial number of amendments will be made to the corporate interest restriction (CIR) rules, covering issues such as unintended mismatches and anomalies, elections and deadlines.
The CIR rules exist to limit large businesses reducing their taxable profits via excessive interest expenses in the UK.
A number of changes will be implemented to assist the legislation in meeting its aims, reduce anomalies, unfair results and reduce administration. These include:
Whilst mechanical in nature, the CIR rules are complex and often require full and detailed analysis to prepare accurate calculations and consider relevant elections. It is not uncommon to find mismatches or unexpected differences between company and group interest expenses, and attempts to harmonise the rules are welcome.
Some borrowers may have also wished for a rise in the £2 million de minimis threshold, which may now be more easily breached given recent interest rate rises. In light of increased interest costs, businesses potentially within the scope of CIR should consider their likely future borrowing requirements and submitting abbreviated interest restriction returns on an annual basis. This may preserve unused interest allowance, which could prove valuable given the increase in interest and corporation tax rates.
Most provisions apply for periods commencing on or after 1 April 2023, however some apply to periods ending on or after 6 April 2020 and some are effective upon Royal Assent of Finance Bill 2023.
The pension lifetime allowance charge will be removed, before it is fully abolished in a future Finance Bill. Alongside this major change, increases in the annual allowance, the money purchase allowance, the minimum tapered allowance, and the minimum tapered allowance income threshold were also announced.
The lifetime allowance is the maximum amount that can be held in a pension before it is subject to an additional tax charge. Currently, the allowance is £1,073,100. From 6 April 2023, the lifetime allowance charge will stop being levied and from April 2024 the lifetime allowance itself will no longer exist. This means that an individual is no longer restricted on the total amount that can be held in the pension fund.
Despite the lifetime allowance being removed, there will still be a restriction on the total amount of tax-free cash that can be taken from a pension. This will be limited to 25% of the current lifetime allowance, which equates to £268,275. That said, anyone with any form of lifetime allowance protection will still be entitled to a higher level of tax-free cash. It is not yet clear whether or not making future pension contributions will result in this protection being lost.
The annual allowance for pension contributions will also increase from the current level of £40,000 to £60,000, and the ability to carry forward unused allowances for three tax years will remain in place.
Annual allowance tapering will also remain but the threshold after which the annual allowance will be reduced will increase from £240,000 to £260,000. The minimum annual allowance after tapering will increase from £4,000 to £10,000.
Finally, the money purchase annual allowance will increase from £4,000 to £10,000. The money purchase annual allowance may apply if an individual has already started to draw an income from their pension.
Following many years of restrictions being applied to pension savings, this is certainly welcome news. Relaxation of allowances was expected, with specific reference made to NHS doctors, where reports suggested 80% were being caught by the lifetime allowance charge when retiring.
The announcement however takes this further than anticipated with the abolition of the lifetime allowance.
As the Chancellor pointed out, this will not only benefit NHS doctors but also many other pension savers who were reluctant to continue saving into their pension for fear of breaching the lifetime allowance.
As pension funds usually fall outside the scope of IHT, this abolition has the added advantage for taxpayers of providing additional shelter from IHT.
While the lifetime allowance means there is no restriction on the size of a pension pot when taking benefits, tax-free cash will still be limited to 25% of the 2022/23 lifetime allowance.
Additionally, the annual allowance restriction and tapering rules still remain in place, which will limit a high earner’s ability to save into their pension.
Overall, however, a positive set of announcements for those looking to save for the future via a pension.
From 6 April 2023.
The Government is considering reforms to simplify the VAT treatment of supplies within the financial services sector.
The Government announced it is considering the responses to a recent consultation of the proposed reform of the VAT rules on fund management services and will publish its response in the coming months.
The Government also announced it will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services in general. The aim of this measure is to reduce inconsistencies and provide affected businesses with greater clarity and certainty.
The Government will publish its response to the review on fund management services soon, and will keep the treatment of financial services under review.
The VAT treatment of financial services is one of the most complicated areas of VAT, so any measures to simplify the VAT treatment are expected to be generally welcomed by the financial services sector.
Currently unknown.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.
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