Is the 'pension planning' light at the end of the bleak budget tunnel?

"My name’s Hunt and I’ll try to be blunt, after the last chancellor’s stunt, I’m trying to give the economy a shunt."

True to his word, Jeremy Hunt has delivered one of the bleakest budgets ever with massive tax raises and spending cuts. Here we breakdown some of the key points:

Income Tax

The income tax personal allowance and the threshold at which individuals start paying higher rate tax will be frozen until 2028 – extended by another two years. So, although there are no headline changes to tax rates, as wages rise over time, a greater proportion of earnings fall into basic, higher and additional rates of income tax. Essentially, this is a ‘stealth tax’.

The additional rate tax threshold will reduce from £150,000 to £125,140 from 6^th April 2023 for individuals in England, Wales and Northern Ireland (Scotland sets its own income tax rates and the next budget will be published on 15^th December 2022). This will result in many more people paying the 45% additional rate of tax.

The reduction of the additional rate threshold to £125,140 aligns it with the point individuals lose their personal allowance – this means that if an individual is earning income between £100,000 and £125,140, they pay an effective tax rate of 60% due to the personal allowance reducing by £1 for every £2 income exceeding £100,000.

Capital Gains Tax

The annual exemption amount for capital gains tax will reduce from its current amount of £12,300 to £6,000 from 6^th April 2023, and then reduce further to £3,000 from 6^th April 2024. This will affect people with investments not held in an ISA, investment bond or pension who decide to sell or crystallise these investments and realise any potential gains. Careful planning and consideration should be made to avoid tax consequences otherwise individuals will need to accept there will be tax payable from these investments in future when selling or realising gains above the exempt amount.

It is important to highlight that there was no change to the rate at which individuals pay Capital Gains Tax and these will continue to be at 10% for basic-rate taxpayers and 20% for higher-rate tax payers, with an 8% surcharge for sales of residential property.

Dividend Allowance

The amount of dividends you can receive in a tax year without paying tax will be cut from £2,000 to £1,000 from 6^th April 2023, and further cut to £500 from 6^th April 2024. This will result in many more investors having to complete tax returns if their dividend income exceeds the allowance, for dividends received outside of an ISA, Pension or Investment Bond

Inheritance Tax

The nil-rate band of £325,000 and the residence nil-rate band of £175,000 has been frozen for an additional two years until April 2028. This means that as the values of estates’ increase year by year, more people will breach the inheritance tax thresholds resulting in more inheritance tax being paid. Now is a good time to be reviewing the value of your estate and whether you could potentially be caught out by this in future. There are several methods that can help reduce the value of your estate so discussing these with your trusted advisors is important to see if planning can be carried out to ensure more of your wealth can be passed on to your loved ones.

Pension Planning

With the major changes announced around personal taxation, the attractiveness of making pension contributions becomes even more compelling.

As more earnings become taxable, tax relief at your highest rate of tax (be that 20% to 45%) will still be available as there have not been any major changes on that front. If you’ve also been unfortunate enough to get hit by the 60% tax trap, pension contributions can help to gain your personal allowance back, depending on how these are structure.

In addition, with hits to capital gains tax and dividend tax, investing in a pension will also allow for tax free growth on the underlying investments, and any dividends received will not count towards your dividend allowance. So, if you’ve got an investment pot sitting outside of a tax efficient environment, it may be a good time to review these ahead of the changes next April. Finally, for those fortunate enough to have an inheritance tax problem, looking at pension planning can be double useful, given most modern pension plans will be excluded from your estate for inheritance tax purposes.

In summary, there are now even more powerful reasons to plan for your future.

State Pension

The best news from the budget was the state pension triple lock being maintained. This ensures anyone with state pension income will benefit from the 10.1% CPI increase for next April.

In summary, we may be facing the biggest squeeze on incomes since post war, but this is a great time to review your finances and make sure you’re still on track to meet your goals. Please contact your usual planner/contact at Carbon if you would like to discuss any of the above or contact enquiries@carbonfinancial.co.uk.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

Tax and Estate Planning Services are not regulated by the Financial Conduct Authority.