The Chancellor pulled a rabbit of his hat by scrapping the pensions lifetime allowance, but most people still face a painful tax squeeze

“From a personal financial planning perspective, a major rabbit was pulled out of the Chancellor’s hat today with the scrapping of the pensions lifetime allowance altogether rather than raising it as had been widely briefed. Alongside increasing the pensions annual allowance from £40,000 to £60,000 this is hugely welcome news for those who have been deterred from retirement saving by the steep reductions in these allowances over time.  
 
“The Government have also confirmed that the Money Purchase Annual Allowance – the amount that someone can continue to contribute to a flexible money purchase pension once benefits have been taken - will be increased from £4,000 to £10,000 and that the adjusted threshold for the Tapered Annual Allowance will be increased from £240,000 to £260,000 from 6 April. The minimum Tapered Annual Allowance for the very highest earners will increase from £4,000 to £10,000 as well.

But there is a sting in the tail…

“However, there is a sting in the tail buried in the Budget notes with the maximum Pension Commencement Lump Sum for those without protections – known as the tax-free lump sum – to be retained at its current level of £268,275, equivalent to 25% of the current lifetime allowance, and frozen thereafter.

“There will no doubt be some who criticise these changes as ‘tax perks for the wealthy’ but scrapping the lifetime allowance and raising the annual allowance has in large part been driven by some perverse consequences. Pension tax charges arising from the existing thresholds have caused problems for the NHS as they are a significant factor driving early retirement by doctors and deterring surgeons from taking on additional work. This has exacerbated the bulging waiting lists that built up during the pandemic. 
 
Thousands could abandon fixed protection – but need to carefully weigh up tax-free cash implication 
 
“The scrapping of the lifetime allowance will mean that those who have halted pension savings entirely - for example because they took out fixed protection to preserve access to earlier lifetime allowances of £1.25 million or £1.5 million - are now in a position to potentially recommence pension contributions, at a time when more of their earnings are likely to be subject to the higher rates of tax. But in doing so they need to carefully consider whether this will mean forgoing access to a larger tax-free lump sum. For someone in that position who has not contributed to pensions for several years and whose adjusted earnings are below the level at which the horrendously complicated and punitive tapered pension allowance regime kicks in, they could potentially subscribe up to £180,000 in pensions next year. This could be achieved by using the new, larger £60,000 gross annual allowance and then mopping up unused allowances of £40,000 for each of the previous three years under pensions ‘carry forward’ rules. This is therefore an opportunity for some both to provide a massive boost to their retirement pots, and to take shelter from higher taxes.

Most people are staring down the barrel at a higher tax burden

“But despite these mostly welcome developments in pensions for some, we cannot escape the reality that most people are staring down the barrel at a higher tax burden. This tax-year is already forecast to see a record 6.1 million people paying tax at the higher and additional rates of 40% and 45% respectively, a shocking 15.3% increase on the previous year because of the powerful fiscal drag effect from frozen thresholds.  
 
“Today’s Budget revealed no backtracking on either the multi-year freeze in the thresholds for the levels at which both the basic rate of tax and the higher rate of tax kick-in that were announced in the Chancellor’s Autumn Statement. And the planned reduction in the threshold at which the 45% band starts - from £150,000 currently to £125,140 from 6 April – will still go-ahead. Against that backdrop and with UK pay – including bonuses - growing at an average of 5.7%, the numbers being drawn into income tax at the higher rates look set to skyrocket further at a time when people are already feeling the squeeze from rising prices and higher borrowing costs.

A Viking-like tax raid

“The Chancellor’s Viking-like tax raid on shareholders announced in the Autumn Statement is also looming despite much better economic forecasts from the Office of Budget Responsibility since them, with the dividend allowance set to be halved in the new tax year from £2,000 to £1,000, and then savaged again in April 2024 to a meagre £500. Given the dividend allowance was £5,000 as recently as 2017/18, the amount people can receive tax-free in dividends outside of ISAs (Individual Savings Accounts) and pensions is being obliterated. 
 
“The amount that investors can realise tax-free from crystallised gains from the sale of assets is also set to be aggressively cut back within weeks, with the annual Capital Gains exemption to be reduced from £12,300 this tax year, to £6,000 in 2023/4 – and then halved again from April 2024 to just £3,000.

The most important tax-year end in living memory

“So, despite some fantastic news for those with larger pension pots today, the tax outlook remains bleak for most people, underlining the importance of making as much use of the allowances available while you can. This includes topping up pensions to benefit from income tax relief, crystallising gains while the bigger exemption is available and migrating investments held in a taxable environment into ISAs, if possible, to shelter future returns from tax. Married couples can also transfer assets to whichever spouse might have spare allowances that can be used or who is subject to lower rates of tax.

“For some, more esoteric tax efficient but higher risk schemes, like Venture Capital Trusts and Enterprise Investment Schemes, which the Government has encouragingly reaffirmed its commitment to, may be worth considering.  
 
“In my view this is one of the most important tax-year ends in living memory given impending changes – but there is now only a short amount of time for people to act and the clock is therefore ticking.”

ENDS

Important information

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. Details correct at time of writing.

The value of an investment may go down as well as up and you may get back less than you originally invested.

Tax legislation

Prevailing tax rates and reliefs depend on your individual circumstances and are subject to change. Clients should always seek appropriate tax advice before making decisions.