Savings and Pensions
The investment limits for 2023/24 remain £20,000 for a standard adult ISA (within which £4,000 may be in a Lifetime ISA – unchanged since 2017/18), and £9,000 for a Junior ISA or Child Trust Fund.
The government intends to restrict the management of these investment funds to financial institutions with a UK presence. This will apply from April 2024.
Pension contributions (Table B)
The generous tax reliefs given to registered pension funds are limited in amount by two main rules: the Annual Allowance (AA) and the Lifetime Allowance (LTA).
The AA has capped the amount that can be put into a tax-favoured pension fund at £40,000 a year, which is reduced where the person earns over £240,000 a year down to a minimum of £4,000 (at an earnings level of £312,000 or above). Contributions made above the AA by either the individual or their employer are subject to a tax charge.
This has caused difficulties particularly for employees in final salary schemes, where the rules calculate a ‘deemed contribution’ based on their accrued pension benefits at the beginning and end of the year. This can produce unpredictable and substantial tax charges, and has been blamed for some senior doctors deciding to retire early.
From April 2023, the AA is increased to £60,000; the taper will begin at £260,000, and the minimum AA will be £10,000. There is also an increase in the Money Purchase Annual Allowance, which applies where someone has started to draw taxable benefits from a money purchase pension scheme and then wishes to make further contributions: this will also be increased from £4,000 to £10,000.
The LTA has capped the total amount that can be saved in a tax-favoured pension scheme. It was introduced in 2006 at £1.8 million, but had been reduced several times and in 2022/23 stands at £1,073,100. The Autumn Statement provided for this to be frozen along with other allowances until the end of 2027/28. If the pension fund value exceeds the LTA when benefits are first taken from the fund, and again at age 75, the excess has been subject to a tax charge – 25% if the excess is left in the fund to be drawn as taxable income, and 55% if it is drawn out as a lump sum.
There were rumours before the Budget that the old limit of £1.8 million would be restored, but instead the Chancellor announced that LTA charges would be abolished altogether from 6 April 2023. The maximum amount that can be drawn as a tax-free lump sum remains 25% of the current LTA (25% x £1,073,100 = £268,275) unless the person is entitled to ‘protection’ in relation to the original introduction of the LTA or any of the subsequent reductions of the limit. The LTA will be abolished altogether next year and a separate rule will be brought in to limit the tax-free lump sum.
This may encourage people who have stopped contributing to funds because they are over or near the LTA to consider further investments. The problem with pension schemes is that the rules change many times over the life of the scheme, and the most relevant ones are those in force when benefits are taken. A change of government could possibly lead to a reintroduction of something similar to the LTA charge; that ought to be mitigated by transitional rules such as ‘fixed protection’, but it would be prudent to bear in mind the possibility that this very substantial tax cut for those with the largest pension pots might not be permanent.
Taking pension benefits
The minimum age at which people can first access their tax-advantaged pension scheme benefits is currently 55, but will be increased to 57 with effect from 6 April 2028. That increase will affect those who were born on or after 6 April 1973. In spite of speculation that this might be raised again, no announcement was made in the Budget.
Seed Enterprise Investment Scheme (SEIS)
As announced in September 2022, the generosity of the SEIS will be increased with effect from 6 April 2023. The amount that companies will be able to raise will increase from £150,000 to £250,000; the gross asset limit will be raised from £200,000 to £350,000, and the age limit on a qualifying trade will be increased from 2 to 3 years. The annual limit for investors will be doubled to £200,000.