The Spring Budget 2023 sees significant changes to tax allowances as the Government encourages professionals to stay in work for longer
In this year’s Spring Budget, the Chancellor, Jeremy Hunt, announced the steps the Government propose to take to ensure economic stability and deliver the Prime Minister’s promise to ‘grow the economy’.
The Chancellor paid particular attention to ‘removing the barriers in place preventing people from working’. He confirmed over 3.5m older, experienced and highly skilled workers are currently out of work, an increase of 320k since pre-Covid times. In a bid to ensure that this group are not disincentivised from remaining in the workforce and to encourage them to extend their working lives, and in turn boost the UK’s stalling economy, the government has implemented certain increases to tax relief on pensions.
Abolition of the Lifetime Allowance
Despite the Government previously imposing a freeze on the current Lifetime Allowance cap (LTA) of £1.073m until 2026, the Chancellor today announced that the LTA will not just be increased as previously predicted but completely removed! The Chancellor confirmed that the Government hopes this will prevent over 80% of NHS clinicians from retiring/leaving work early, at the point they are most needed, due to tax implications.
Sarah Garnish, a Consultant at Quantum Advisory, said:
“The low Lifetime Allowance cap has been discouraging higher paid earners who took early retirement during Covid from returning to work, and also preventing older, often highly experienced and skilled professionals from working longer, through fear of being faced with substantial tax charges. The abolition of the LTA will benefit a considerable number of people and is likely to keep NHS doctors and other professionals working until later in life.”
An increase in the Annual Allowance…
In addition to the abolition of the LTA, the Chancellor also announced that the Annual Allowance cap (AA) on pension contributions will receive a significant increase with effect from April 2023, seeing the current cap of £40k per annum increase to £60k per annum.
Sarah Garnish, a Consultant at Quantum Advisory, said:
“Pensions annual allowance statistics from HM Revenue and Customs (HMRC) show extensive increases, since 2012/13, in the number of workers who have been stung by the AA cap.
“This considerable increase of £20k per annum will provide workers who have been limited by the cap for the past few years with headroom to catch up on any missed pension savings, and in conjunction with the abolition of the LTA may even encourage some highly-skilled workers who have reduced their hours or taken early retirement back to work.”
…and an increase in the Money Purchase Annual Allowance…
The Money Purchase Annual Allowance (MPAA) is a special restriction imposed on the amount people can pay into their pension while still receiving tax relief. MPAA kicks in when someone starts to ‘flexibly’ access their pension pot for the first time and substantially reduces the amount they can pay into a pension arrangement from £40k per annum to a mere £4k per annum.
The Spring Budget confirmed that in order to support those who left the labour market and ‘flexibly’ accessed their DC pension benefits, to return and supplement their income, or build up their retirement savings, the government will also increase the MPAA cap to £10k per annum from April 2023.
Sarah Garnish, a Consultant at Quantum Advisory, said:
“The Government really did stay true to their word when they pledged to consider the conditions necessary to make ‘working worthwhile’. This announcement will come as a welcome relief for a number of people who chose to access their DC pension pots during the difficult times surrounding Covid, yet still want to continue saving for their retirement now that the economy has stabilised.”
…and an increase in the Minimum Tapered Annual Allowance!
Since its introduction in 2016/17, the Tapered Annual Allowance (TAA) has restricted the Annual Allowance for those with taxable income over a certain threshold. Currently, for every £2 of income earnt over £240k the Annual Allowance is reduced by £1, to a minimum allowance of £4k.
The Spring Budget confirmed that the point at which the TAA starts reducing has been increased to £260k, and it will now taper down to £10k instead of £4k.
Sarah Garnish, a Consultant at Quantum Advisory, said:
“The Government has no doubt paid particular attention to keeping the older, more experienced and highly skilled workers from being disincentivised from remaining in the workforce. There is a careful balancing act here for the Government, wanting to keep people in the workforce without being seen to give too many tax breaks to wealthy individuals.”
Retention of Public Sector workers
In a bid to help retain the public sector workforce, the Spring Budget confirmed that both open and closed public service pension schemes will be considered linked for the purpose of calculating Annual Allowance charges.
This will allow members of the public sector workforce to offset any negative real growth in legacy public service pension schemes against their Annual Allowance calculation.
Sarah Garnish, a Consultant at Quantum Advisory, said:
“This is a policy that will help many high-earning or long-serving public sector workers, and it will further ease some of the issues the NHS faces. It sets an unusual precedent though by giving preferential tax treatment to public sector workers. It also creates potential headaches for private firms operating outsourced Government contracts, where benefits are designed to replicate public sector benefits.”
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About Quantum Advisory
Established in 2000, we are an independent, owner-managed actuarial and employee benefits consultancy that provides straight-talking, no-nonsense advice to employers and pension scheme trustees. We design, maintain and review pension schemes and related employee benefits so that they operate efficiently and effectively. We also help communicate these benefits in a straightforward way so that employees understand their real value.
