Lifetime allowance abolished in pension tax reform bonanza

Chancellor Jeremy Hunt revealed a series of surprise measures on pension taxation, with plans to abolish the Lifetime Allowance among the most eye-catching. Other major announcement included a 50% increase to the annual allowance to £60,000 and a £6,000 rise in the MPAA, as well as extending free childcare hours to parents of children as young as nine months, and the introduction of a new ‘full capital expensing’ regime for businesses.

Pensions

The Chancellor delivered a huge surprise at the Budget, setting out plans to scrap the Lifetime Allowance and increase the annual allowance by 50%. Taken together the package of reforms will cost around £4bn over the next five years according to government forecasts. It unleashes huge potential for customers to fund their SIPP, taking advantage of the dramatically improved tax situation.

• Lifetime Allowance

Several key changes were announced, with the pensions Lifetime Allowance (LTA) to be scrapped completely, Chancellor Jeremy Hunt has announced in the Spring Budget.

From April 2023 LTA tax charges will be removed, with the government subsequently planning to legislate to abolish the LTA altogether from 2024.

The legislation to abolish the LTA will be put forward in a separate bill at a later date. The government says those with LTA protection in place will effectively see that superseded by announcements and will no longer be required to comply with protection conditions.

The maximum limit on tax free cash will be frozen at its current level of £268,275 - from 6 April 2023 onwards. However, individuals with protected entitlement to tax free cash can retain it, so don’t tear up those protections just yet. Further details of how this will work in practice are expected in future legislation.

• Annual Allowance

The annual allowance will rise 50% from the current £40,000 to £60,000 from 6 April.

Carry forward from the previous three tax years will continue to be permitted.

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. AJ Bell has campaigned to return the MPAA to £10,000 and for the government to consider removing it altogether, making the news a welcome development.

Finally, the Tapered Annual Allowance (TAA) will rise to £10,000, and the adjusted income threshold for the TAA also rising to £260,000.

Childcare

Working parents received a boost as the government confirmed plans to widen access to the ‘free hours’ scheme. Although the reforms will be phased in meaning there is no immediate benefit this year.
Currently working parents can claim 30 free hours for 38 weeks of the year for three- and four-years olds, but no support is offered for those with younger children.

From April 2024 parents of two-year-olds will get 15 free hours, while those with younger children will have to wait until September next year to get the 15 free hours before the full 30 hours is brought in in September 2025.

The government is also increasing what it pays nurseries for these free hours. Until now the ‘free’ hours have been anything but, with the government paying such a low sum for the hours that most nurseries are forced to construct a patchwork of charges for parents to make up the shortfall. The government says it will allocate another £204 million from September this year to boost the amount paid to nurseries – although it’s unclear if this is sufficient to bridge the entire funding shortfall or if parents will still have to top up.

Those on Universal Credit will also benefit from two changes in the Budget. Those moving into work or increasing their hours will no longer have to pay for their childcare costs upfront before claiming them back. The cap on the amount they can claim will also rise to £951 for one child and £1,630 for two children.

Collectively the moves will cost the government £5.3 billion a year by 2026-27 when they are fully implemented.

It is expected that childcare costs will continue to be an issue debated among policymakers, particularly as we approach the next General Election.

Economy

The OBR is now forecasting the UK will avoid a technical recession this year, with the economic outlook improving since its last assessment in November.

The improvement in the short term outlook is partly a reflection of the crisis the country faced when the Chancellor delivered the Autumn Statement, in the wake of the dramatic market movements precipitated by the mini-Budget.

Since then, interest rate expectations have fallen, as have wholesale energy prices, and both the economy and tax revenues have proved more resilient than expected. The result is a little pot of money the government can now spend without quite breaching its latest set of fiscal rules, which themselves are a little less stringent than their previous incarnation.

The OBR now predicts CPI inflation will fall dramatically to 2.9% by the end of this year, and drop again to 0.1% in 2025. After double digit rates of inflation, this might sound welcome to those facing rising living costs, but in fact, such low inflation suggests wider weakness within the UK economy.

Income tax thresholds will continue to be frozen this year, and cuts to tax-free dividend and capital gains allowances are arriving from April too, with OBR still projecting that the tax burden will reach a post-war high of 37.7% of GDP in 2027-28.

NS&I to offer better rates

The government has increased the amount of money it wants NS&I to attract. NS&I will now be asked to attract a net £7.5 billion for 23-24, up from £6bn.

This is likely to mean NS&I will have to make its products more attractive to savers – which equates to higher interest rates for savers. It also means the Premium Bonds prize fund will undoubtedly be boosted again, to lure in more savers.

While the funding target is nowhere near the £35 billion set during the pandemic, we can expect NS&I to go back to its pandemic playbook and significantly boost rates across the majority of its accounts.

This could have a double boost for savers, as they can get higher rates with the government-backed provider and also it may spur other savings providers to increase their rates.

Fuel duty

This marks the thirteenth consecutive year of fuel duty freezes – and it’s a freeze that no government can face thawing. Despite hinting in recent years that it would need to be unfrozen to pave the way for the government’s greener agenda, Mr Hunt doesn’t want to attract criticism from the nation’s motorists.

The Chancellor has also maintained the 5p cut in fuel duty introduced a year ago, which means for the average 55 litre car someone will save £3.30 each time they fill up*.

Energy bills

The Energy Price Guarantee has been extended until July. The move is expected to save average households £160 and means that a household bill for typical usage will stay at £2,500 for a further three months, by which point warmer weather and the prospect of lower wholesale costs should ease the pressure on energy bills. 

Falling wholesale energy prices gave the government a windfall to spend, with the Energy Price Guarantee only costing a third of its expected £12 billion cost so far. This extension to the measure will add another £3 billion to the bill, still keeping the government under the original budget.

The measure also helps to reduce inflation – which is crucial if they are to meet their self-imposed target of halving inflation before the end of the year.

Those on pre-payment meters will also be handed some extra relief, as they will no longer have to pay higher rates for their energy.

Despite the measures, energy bills will still rise as the £400 support with energy bills households received this winter will still end in April, meaning that £66 or £67 a month rebate will disappear.

Business taxation

Corporation tax will still rise to 25% from April. Despite speculation, and pressure from business lobby groups, the government has stuck to the planned increase.
The headline tax perk for business came in the form of the introduction of ‘full capital expensing’. From April 2023, companies can claim 100% capital allowances on qualifying plant and machinery investments. This replaces the super-deduction introduced in 2021 at 130%.

The government plans to make full capital expensing a permanent measure, although initially the policy will run for three years until 2026.

Crypto

Those with gains from cryptoassets will need to complete separate section on their self-assessment tax return, suggesting HMT seems to be stepping-up its targeting of crypto asset profits.
This suggests the taxman thinks not enough people are paying tax on their crypto profits, though the changes to the tax return may well have more lucrative for the taxman when Bitcoin was trading at record highs.

*This takes into the account the fact that the 20% rate of VAT on top will be lower as the total petrol price per litre is lower.

Remember that the value of investments can change, and you could lose money as well as make it.
How you're taxed will depend on your circumstances, and tax rules can change. Tax, ISA, pension and rules apply.

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