Written by Ray Coman
Against a background of high inflation, national strikes and global unrest, Jeremy Hunt gave his first Budget since becoming chancellor. A rise in energy prices and defence spending have placed fresh demands on the Treasury. In response, the government has been able to harness rapid inflation to raise revenues through freezes in allowance thresholds. This process, referred to as Fiscal Drag, has the benefit to a policymaker of causing less headline alarm than tax rises. Indeed, stability has been in focus, after recent inflation related tremors through the banking sector and in the aftermath of the Liz Truss crisis. By comparison with recent years, the 2023 Budget contained fewer dramatic moves on tax policy.
In the context of the above, the delivery of incentives to the investment and business world, especially by way of relaxation to pension rules, came as some relief. An election less than two years away against an opposition leading in the polls could provide some explanation. The evaporation of lockdown costs also offered to relieve pressure on government spending, and allowed for the extension of covid related measures to encourage business spending, principally through annual investment allowance.
The lifetime allowance is the value that a pension can reach before it will suffer an excess charge. The pension is valued against the lifetime allowance on a vesting event, which is typically when the pension holder starts to draw benefits. The lifetime allowance charge will be abolished from 6 April 2023. Certain lifetime allowance related processes will need to be in place until 2024/25 which would be carried out by the pension administrator.
The chancellor sited incentivises for doctors as the reason behind the change. However, the regulations will affect UK pension holders of all occupations.
Currently, an amount equal to 25% of a pension can be withdrawn as a tax free lump sum when the pension holder starts receiving a pension. This tax relief will continue to apply up to a limit of £268,275. The limit on the pension commencement lump sum happens to be the same as 25% of the current lifetime allowance.
An amount invested into a pension for a given tax year in excess of the pension allowance, is subject to an excess charge. The charge effectively adds the pension contribution back into income so that it is taxed at the taxpayer’s marginal rate. The maximum pension allowance is currently £40,000, but announced in the Budget was an increase in the allowance to £60,000. This will allow taxpayers to obtain greater tax relief on pension contributions.
The limit at which the allowance starts to taper will also increase from £240,000 to £260,000 on 6 April. Once income exceeds this “adjusted income limit” the pension allowance will start to taper at a rate of £1 for every £2 that it is over that limit. The tapering continues until the allowance reaches a minimum. That floor will also rise from £4,000 to £10,000 with effect 2023/24.
The allowance for brought forward years will not alter. Once the current year allowance is exhausted, the taxpayer can make use of unused allowance for the preceding three tax years. The allowance applicable to preceding years will remain as the allowance in force at that time.
The money purchase allowance is the amount a person can contribute to a pension if that person has already started drawing benefits. It can be an effective tax plan for individuals who continue to work after they have started receiving a pension. The money purchase allowance is set to increase in 2023/24 from £4,000 to £10,000.
50% rise in annual allowance and scrapping of the lifetime allowance were the most significant aspect of the Budget.
The annual investment allowance is the amount that a business can deduct from taxable profits for investment in equipment, machinery and other capital assets. Where the amount of investment exceeds the allowance, the rate at which tax relief is available drops. The annual investment allowance was increased to encourage spending by businesses during lockdown. It was set to reduce from £1 million to £200,000 on 6 April 2023. However, the government announced that the limit will be fixed at £1 million indefinitely.
In the Autumn statement, the government announced a reduction in the rate of enhanced deduction for small and medium sized businesses from 130% to 86%. Where a company is loss making, the loss can usually be set against profits of a preceding year or carried forward to profits of a future tax year. However, R&D companies might have to operate for several years before becoming profitable and therefore the usual loss rules present a cashflow strain. As a result, the regulation allows the loss to be exchanged for a government pay out, known as an R&D tax credit. The R&D tax credit for large business is set to increase from 13% to 20% and for small and medium sized business it is set to drop from 14.5% to 10%. All of the above changes will be effective 1 April 2023.
The reduction in tax relief was in response to abuse by SMEs of the R&D tax relief. Therefore, the Budget included an announcement that research and development claims will have to be accompanied by additional information which among other requirements must categorising qualifying expenditure. For SME businesses that invest over 40% of expenses in R&D the legacy rates continue to apply.
Fiscal drag is the process by which inflation causes an increase in tax liability for the taxpayer as a result of fixed allowances. With current rates of inflation, it is notable that the personal allowance, higher rate and additional rate tax thresholds are not increasing. On the contrary, as announced in the November statement, the capital gains tax allowance is halving in April and halving again next April to just £3,000. The additional rate limit is also reducing to £125,000. The nil rate band, which is the rate above which inheritance tax is applicable to an estate, has not increased since 2009. The individual savings account limit has also not changed from £20,000 per annum.
From 2024/25, it will be a requirement for cryptoassets to be identified separately on the capital gains tax supplement of the self-assessment Tax Return.