https://www.blevinsfranks.com/uk-budget-2023-pensions/
UK abolishes the pensions lifetime allowance tax charges.
By Stephen Rankine, Private Client Manager, Blevins Franks
The UK 2023 spring budget included the surprise announcement that the lifetime allowance is being abolished. These tax charges apply wherever you are resident, so this was very welcome news for British expatriates living in Madeira who have built up large UK pension funds. But how long will it last?
The UK 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.
UK Chancellor Jeremy Hunt is hoping that the decision to abolish the LTA will help retain the senior workforce within the NHS and even tempt some to return.
The pension changes included in the budget
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 likely to swiftly exceed it) there may be options to transfer to a suitable alternative pension scheme depending on their personal situation. It’s worth seeking specialist, regulated advice to look at your situation now. Pension transfers can take several months and the clock is ticking towards the next UK general election which must be held by 24 January 2025, and 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 “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” and that “a Labour government will reverse this move”.
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.
Other UK budget tax changes
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.
To simplify administration, the government will formalise and extend an existing income tax concession for low-income trusts and estates. 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 will remain frozen until April 2028, and the additional rate threshold reduced to £125,140.
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.
The cuts to the capital gains tax exemption threshold and the dividend allowance, announced in the Autumn Statement, go ahead as planned.
Take personalised advice to ensure your tax planning is up to date, both for the UK and Spain, and to full benefit from any positive tax reforms.
The 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; an individual should take personalised advice.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.
