NEWS & VIEWS
Our team has been hard at work analysing the 2023 Spring Budget. Here we provide a summary of the tax changes which may affect our clients and explore what the budget will mean for the 2023-24 tax year and beyond.
2023 Spring Budget at a glance
- The personal allowance and starting rate for savings will be maintained at their current levels.
- Small companies will not pay the full 25% Corporation Tax rate – only 10% of companies will pay this.
- Companies which make qualifying investments will receive a 100% deduction of the amounts invested from their Corporation Tax bill.
- The pension annual allowance has increased from £40,000 to £60,000 from April 2023.
- The pension lifetime allowance charge will be removed from April 2023, and abolished from April 2024.
- The ISA investment limit will stay at £20,000 per year.
- The maximum amount which an investor may invest into Seed Enterprise Investment Scheme companies and receive tax relief on has increased from £100,000 to £200,000.
- A change to the CGT Self Assessment form has been announced so that amounts on cryptoassets are identified separately. This will be introduced from 2024/25.
Big tax savings for investors making provision for retirement
The headline for investors will be that two of the caps on tax relief for pension contributions have been lifted. The annual allowance will rise from £40,000 to £60,000, while the lifetime allowance charge will be removed for 2023-24. The lifetime allowance will be abolished from April 2024.
Another cap that was lifted was the money purchase annual allowance (MPAA). The purpose of the MPAA is to prevent someone of retirement age from getting two lots of tax relief in one go: contributing to their pension from their normal income and receiving tax relief at their marginal income tax rate, and also drawing from their pension and receiving 25% of that withdrawal tax-free.
The annual allowance is the maximum gross amount of contributions that may be made into your pension pots per year, including contributions made by your employer, which receive tax relief. Anything you contribute above this allowance you can still save into your pension, you just can’t enjoy tax relief on it.
The lifetime allowance is the maximum value of all your pension pots which may enjoy tax relief.
Now, there are two key caveats to these policies.
The first is that the cap on the 25% tax-free lump sum is frozen at £268,275, or 25% of the current lifetime allowance of £1,073,100. So, you may get tax relief on more of your pension, but if you withdraw millions as a lump sum then only £268,275 of it is tax-free.
The second caveat is that the annual allowance is tapered for individuals whose ‘adjusted income’ is above £240,000. There is no change to the tapering of the annual allowance for those individuals, meaning that, in the words of ITV’s Robert Peston, “this is a bung to the rich […] but not the super-rich”.
But very little for ‘rainy day’ savers
The Spring Budget did a lot for pension savers but for those people who save and invest for use during their working lives, there was very little. In fact, such a person will be worse off from 6th April 2023 than they were before.
The November Autumn Statement froze the personal allowance and basic rate band, while several thresholds were cut. The dividend allowance was halved to £1,000 from April 2023, then to £500 from April 2024. The annual exempt amount of capital gains was halved to £6,150 from April 2023 and then cut to £3,000 from April 2024.
In today’s budget, Chancellor Jeremy Hunt stated that the starting rate limit for savings income would be maintained at £5,000 rather than increasing with inflation. Furthermore, the current ISA investment limit of £20,000 would be maintained.
These measures which keep bands and thresholds at their current amounts rather than increasing with inflation are known as ‘fiscal drag’ owing to the additional tax revenue they bring in for the Government without having to raise tax rates. It is seen as politically risky by many. Incomes are going up and the amounts that people wish to save are going up, but the amounts that will be tax-free are staying the same or even reducing. This ultimately means higher tax bills on all income, but particularly savings and investment income.
A lot more people to be caught by capital gains tax
As we discussed following the Autumn Statement when the reduction in the annual exemption was announced, the Office of Tax Simplification projected that reducing the CGT annual exemption to £6,000 would bring nearly a quarter of a million more taxpayers into the charge on capital gains.
Our prediction at that time, and our working hypothesis in the months leading up to this Budget, was that HMRC would do something to ensure that any individuals unexpectedly caught by the CGT charge were given relief. After all, the economic circumstances were similar to those in 1985 when the 1982 rebasing was brought in: high inflation, additional charge to CGT brought in, and a Conservative Government. No measure targeting those people has been announced. This means that a many more people will find themselves completing a CGT return, with no relief for inflation. And, surely, a lot more queries going HMRC’s way.
Tax-efficient investments whittled down to a chosen few
Social Investment Tax Relief – a relief on investment in local, social enterprises – will be scrapped from April 2023. Instead, the Government has prioritised lifting the investment limits on Community Investment Tax Relief. This has a similar objective except that it is for disadvantaged communities only. It is also lifting the investment limits on Seed Enterprise Investment Scheme companies – usually start-up companies which need seed funding.
Combined with the additional relief on pensions and the frozen relief on ISAs, we are seeing investment relief targeted at a few favoured objectives – retirement, disadvantaged communities, small businesses.
Cryptoassets and CGT
Long after crypto first became ‘a thing’, had its first bull market, bear market, economic downturn, regulatory nightmare, and court case following a major international scandal, we had something from the Government about cryptoassets. And that measure is the capital gains tax return pages will have a section for cryptoassets added to it. For 2024/25.
I do think it is a good thing. People trade cryptoassets in higher volumes than any of the other assets which come under the current category of ‘Other assets’. It’s just, dare I suggest it, a little late.
This article does not constitute tax or financial advice. If you have any thoughts or feedback please send your comments to FSLResearch@financialsoftware.co.uk. The FSL Business Analysis team is actively analysing any potential changes today’s announcements will have on our products moving forward.