Budget 2023 – Personal Tax
The focus on a "back to work Budget", to aid growth in the economy, means the major tax changes were about businesses and pension provision. The removal of the pensions lifetime allowance cap of £1.07m, freeing up high earners to make new pension contributions is designed to encourage people back into work. Pension contributions can also make a major difference helping with the growing income tax squeeze - see below.
The major changes on personal tax were made last November, in Mr Hunt’s Autumn Statement, with the “stealth tax” freezing of IHT, CGT and Income tax exemptions and allowances further developed. The personal tax changes are likely next year when, if possible, the Chancellor is likely to give tax cuts ahead of an election.
Taxpayers need to be aware of these major tax issues that need careful planning ahead:-
Inheritance Tax (IHT): The stealth tax regime is designed to increase the tax take without increasing the rates of personal tax. IHT is due to raise more than a third more, in the five years to 2027, so that many estates will simply pay more tax by doing nothing. The freezing of the Nil Rate Band (NRB) at £325K goes on for a further five years, making it 19 years without an increase; the residence nil rate band (RNRB) for homes left to descendants is also frozen at £175K for seven years until 2028, along with the threshold over which you start to lose the RNRB, kept at £2million. This means the marginal tax rate on capital over £2m, effectively 60%, affects more and more estates! So careful planning on lifetime gifts (“giving while living”) to younger generations and making the most effective arrangement in wills, especially between spouses, is more important than ever.
Residential Property: The previous increase to SDLT thresholds announced in Autumn 2022 - which increases the amount buyers can pay for residential property before being liable to pay SDLT - was originally billed as a permanent" change but then became a limited window that closes on 31 March 2025. So planning ahead is vital as this two year window will go fast. Many will be looking to help their children, or other relatives, desperate to get on the property ladder, with help from the Bank of Mum and Dad (BOMAD). If waiting for house prices to fall - as many are understandably doing – don’t wait too long as purchases will need to be completed (or at least "substantially performed" by taking possession or paying the bulk of the purchase price) by that date.
Capital Gains Tax (CGT) and Investments: Annual exempt amounts for CGT are being slashed, the current £12,300 for individuals reducing to £6K from 6 April 2023, and then £3K from April 2024, so cut to less than a quarter! This will result in a direct cost to the public selling second homes; the rate of CGT you pay depends on whether you are a higher rate taxpayer and whether the gain is from the sale of a second property. If both of those apply, the change will add £1,764 to the CGT bill of a higher rate taxpayer selling a second home after April this year.
Alongside that, the dividend tax free allowance is being cut from £2K to £1K and then only £500 in 2024/5; while all dividends will continue to be hit with an extra 1.25% tax, left over from the health and social care levy (now withdrawn for National insurance) last year.
This means many people, including spouses planning between themselves, will need to review their investment strategy, to see where they have gains they may wish to realise, especially before 6 April while we still have £12,300 each. Then to consider, with help from a financial planner if any change of investment strategy may be appropriate given these major tax changes. Clearly the full use of ISA allowances, frozen at £20K, is important for tax free income and gains. But other changes may be worth making in this new Stealth tax world we must adapt to, for the foreseeable future. For spouses, the option to transfer assets between each other without any CGT liability, is worth exploring.
Income tax: Meantime the income tax squeeze comes through the personal allowance of £12,570 frozen again until 2028, and the threshold at which the 45% additional rate tax is paid being lowered from £150K to £125,140. The 40% threshold remain at £50,270, so all these freezes mean huge increases in the personal income tax being paid by many, while the rates remain the same – stealth taxes are simple and tough for taxpayers! Careful planning is recommended with investment income, between spouses and, especially, after the lifting of the lifetime allowance, pension contributions that can reduce taxable income – sop that in some cases the 40% or 45% rates could be avoided. With taxable income over £100K there is an effective income tax rate of 60% on the band of income up to £125,140 with the loss of a personal allowance by taper. So pension contributions become even more worthwhile.
Pensions: The Chancellor’s speech contained a huge surprise for the Pensions Industry, amazing many pensions professionals: instead of the anticipated increase in the Lifetime Allowance to £1.8 million it was abolished entirely. The additional and expected 50% increase in the Annual Allowance from £40,000 to £60,000 wasn’t a shock. Buried in the Costing Document is a statement that the cap on tax free cash will be set at 25% of the current Lifetime Allowance of £1.073 million. So from April 2023 onwards, the maximum amount of tax free cash available on retirement will be £268,275.00. Abolishing the Lifetime Allowance is expected to cost the Treasury £135million in the 2023-24 tax year, rising to £835million in 2027-28.
Read expert commentary about the Corporate Tax implications here.
