The 2023 Spring Budget was Chancellor Jeremy Hunt’s first real chance at putting his fiscal stamp on UK Plc, given the Autumn Statement back in November 2022 was a tidy up following the economic fallout that had arisen from the ‘mini-budget’ under Liz Truss’ leadership.

Pension ‘hokey-cokey’

The party song is familiar and it does feel like UK pensions have had….’their right arm in, their right arm out and then shake it all about’!

Positively today, we’ve seen a removal of the Lifetime Allowance charge from April 2023. This will be followed by a complete abolition to the pension Lifetime Allowance from April 2024. The Lifetime Allowance was a limit placed on the total tax savings you could have in your pension without incurring a tax charge when you came to take that pension. If you went over that limit when taking benefits, then there was a tax charge of 25% of the excess in your pension over this limit. The Lifetime Allowance Limit was first introduced in 2006 and various protections have applied over time, which impact individuals depending on the level of their funds at particular points in time. Over the years this limit had been reduced, with the current limit set at £1,073,100. In addition to the 25% tax charge on the excess pension funds over and above an individual’s Lifetime Allowance limit, you were then also taxed on the pension funds when extracted from the pension.

The removal of the Lifetime Allowance charge and ultimate abolition of the limit will create significant flexibility for individuals who had previously stopped making pension contributions and have adjusted income levels such that they can make full use of the annual pension allowance. There may be a window of opportunity for such individuals to consider making a pension contribution between now and 5 April 2023, to optimise the tax position in this current year. Investment advice and tax advice should be taken on a case-by-case basis to ensure individual circumstances are considered.   

In addition to the Lifetime Allowance Limit being removed, the Annual Allowance increases to £60,000 per annum from 6 April 2023, up from £40,000. This is the level of pension contributions an individual can make in a tax year and secure income tax relief at their highest tax rate (assuming all brought forward pension allowances have been utilised).

Although the Lifetime limit is being removed and the amount you can contribute to your pension annually has increased, for those highest earners there continues to be a tapering effect on the annual pension contributions you can make and on which you can receive tax relief. If your adjusted income for pension purposes exceeds £260,000 going forward from 6 April 2023, then there will be a tapering to the amount you can contribute, by £1 for every £2 of income over £260,000 (previously this was £240,000).  By the time an individual has income in excess of £360,000+, then the pension annual allowance is tapered down to the minimum £10,000 (previously this was £4,000). 

Given higher income tax rates in Scotland, today’s announcement will mean greater tax savings will be achieved when contributing more into pension than in the rest of the UK. For example, if you made the extra £20,000 pension contribution going forward from 6 April 2023, this will save you up to £9,400 in Scotland and £9,000 in the rest of the UK.

The ability now to save into a pension pot with no upper lifetime ceiling, means that individuals will be able to look at using funds within their pension - for example to possibly acquire other assets they own, such as commercial property, land etc. This may be worth considering, although there are wider tax issues to work through to determine if this is the best approach.

Although the Lifetime Allowance is due to be abolished, in the fine print of the Budget, the maximum tax-free element of your pension has been frozen at 25% up to a maximum of £268,275, in line with the previous Lifetime Allowance (for those without prior Lifetime Allowance protection).

Where an individual has previously accessed money from their defined contribution pension, there are other restrictions to be considered on the amount of contributions they can make to a pension scheme - known as the "Money Purchase Annual Allowance". This allowance is also being increased from £4,000 to £10,000 from 6 April 2023. This means that people who have previously accessed their pension savings but now wish to save further for their retirement may have greater opportunity to do so. However, the rules around Money Purchase Annual Allowance are complex and you should consider taking specialist pension advice to confirm your own position if you have previously accessed your pension savings. 

Capital allowances shakeup

Today saw a shakeup to the Capital Allowances regime for Companies. From 1 April 2023 until the end of March 2026, Companies will be able to claim 100% capital allowances on qualifying plant and machinery investments. Read Aileen Scott's analysis on the capital allowances announcement in this blog here. 

For unincorporated businesses, including sole traders and partnerships and also Limited Liability Partnerships, the rules around capital allowances remain unchanged.

To recap, the Annual Investment Allowance remains available indefinitely. This allowance provides 100% deduction from profits on up to £1million of qualifying capital spend.

Other capital allowances rates and reliefs remain unchanged for entities operating other than as a limited company.

Recap on income tax rates and divergence around the UK

From 6 April 2023 the additional rate threshold of income tax (45% in rest of UK and 47% in Scotland) will be lowered from £150,000 to £125,140. Together with the freezing of the basic rate and higher rate tax bands until 2027/28, which was announced back in the Autumn Statement, there will be fiscal drag felt by taxpayers, particularly those earning at the higher income levels.

However, with the changes to the National Insurance rates during the tax year to 5 April 2023, when the Health & Social Care Levy was removed in November 2022, this means that from 6 April 2023 to 5 April 2024, most people (those earning up to around £110k in Scotland and £130k of income in rest of UK) are better off than in the year to 5 April 2023. This is due to the fact that the Health & Social Care Levy will not apply in the year to 5 April 2024 and so National Insurance rates are in effect lower as we move into the 2023/24 tax year.   

With Scottish rates of income tax now going up by a further percentage point on 6 April 2023 for higher rate and additional rate taxpayers (42% & 47% respectively), the gap between UK and Scottish taxpayers widens further. This starts to kick in from the higher rate threshold onwards, which is lower in Scotland at £43,663 versus England at £50,270.

The tables below illustrate the position for an individual in 2023/24 in Scotland versus rest of the UK.

Carried interest changes

Carried interest is a share of profits earned by general partners of private equity, venture capital and hedge funds. Carried interest typically qualifies for treatment as a long-term capital gain.

Under current rules, a chargeable gain is treated as accruing at the time that the carried interest arises to the relevant individual. It has been proposed in today’s Budget that these rules should be changed so that an individual who expects to receive carried interest can make a voluntary and irrevocable election for their carried interest to be taxed in the UK on an accruals basis. This election can be backdated to 6 April 2022. The aim is to align the treatment with other jurisdictions so that individuals may obtain double taxation relief. 

Inheritance Tax changes

It was announced today that Agricultural Property Relief and Woodlands Relief, Inheritance Tax Reliefs that apply to agricultural property and woodlands held in the UK and EEA, will be restricted from 6 April 2024 to UK agricultural property and woodlands only. This change will impact on landowners with overseas agricultural property and woodlands.

Consideration should be given to any other IHT relief that may apply in the circumstances prior to this change coming in.

Consultations released

There were also a number of tax consultations released today, as is usually the case on Budget day.

Tax & Environmental Land Management

One that could have a particular impact is a consultation and call for evidence in respect of Tax & Environmental Land Management.

From an initial reading of this consultation, it is asking for views around the impact of environmental schemes whereby relief from Agricultural Property Relief (APR) – an Inheritance Tax (IHT) relief - can be lost if the land “set aside” is no longer being farmed. The document highlights this issue but also provides an example, which is listed in HMRC’s manuals, around the loss of APR but the fact that Business Property Relief (BPR) can continue to be available where the farmer continues to farm and the business “in the round” meets the criteria for BPR purposes. HMRC are seeking to understand the issues that diversified rural businesses are seeing in these areas and understand the implications from an IHT perspective where there is a potential loss of IHT relief.

HMRC’s focus is on ensuring farmers are not precluded from such environmental arrangements, and they are considering the existing scope of IHT in terms of these schemes and if the land subject to a Government scheme can continue to attract APR. This would be a welcome change in terms of IHT, particularly as we see more opportunities arising for environmental land management schemes on land in the UK. As a firm, we will be responding to HMRC through this consultation - if you have any views you would like to share, please do feed into your local JC contact. 

Trust & Estates

The Government is introducing new rules to ensure that Trusts & Estates with low levels of income will not have to complete self-assessment tax returns, as part of their simplification to the tax system. There are some nuances, however, broadly, Trusts & Estates with less than £500 of income will not have to pay income tax or submit a tax return.

Other Consultations

A consultation has been released on expanding the cash basis for businesses, to reduce the administrative burden on small businesses from having to account on an accruals basis.

The Government are also consulting on simplifying and modernising the Self-Assessment and PAYE systems.

Other changes announced

As the tax system continues to get up to speed with the latest investment opportunities, it’s been announced today that from 6 April 2023 Cryptoassets will require to be identified separately in future on the self-assessment tax return.

Get in touch

Read the rest of our Spring Budget analysis on our Budget Hub, and for more information or to discuss any of the announcements, please don't hesitate to get in touch with me or your usual Johnston Carmichael contact.