Kicking off his speech, Jeremy Hunt said the UK economy is “proving the doubters wrong.”, whilst he states the International Monetary Fund says the UK is on the right track.
Well, things sounded positive, so lets take a look at some the highlights:
Recession & Inflation
The last 12 months have seen constant headlines about inflation and a looming recession. Well, the budget kicked off with some positivity on these topics.
Mr Hunt stated that the Office for Budget Responsibility (OBR) has released its forecast for the economy and says that due to “changing international factors and measures I take”, the UK “will not now enter technical recession this year”.
On the subject of inflation, Mr Hunt said the OBR report also says that inflation will more than halve by the end of the year. Inflation was at 10.7% in the final quarter of 2022 and is anticipated to fall to 2.9% by the end of this year, Mr Hunt said.
This news will hopefully provide some positive news given the cost-of-living crisis and ease pressures on households moving forward, although it is important to remember these are forecasts, so the future may differ.
It had been expected that the energy price cap would increase from £2,500 to £3,000 for a typical household. In his budget, Mr Hunt confirmed that the price cap would remain at £2,500 for the next three months, aiming to cover prices until July, when energy consumption typically falls. Mr Hunt stated that this measure would save a normal household in the region of £160, every little helps!
The area which has seen a lot of speculation in the build up to the budget, with commentators talking about changes to various allowances. Well, yet again, forecasters might have been on the right tracks, but missed the mark. The following highlights the main changes announced:
- Annual Allowance
The pension annual allowance is the maximum amount of pension savings an individual can make each tax year without incurring a tax charge (and receiving tax relief). Currently this is set at £40,000 and provides individuals with the potential to receive up to £8,000 in Basic Rate Tax relief.
From the 6 April 2023, the allowance will increase to £60,000, increasing the maximum Basic Rate Tax relief by £4,000 to £12,000. This is good news for people still contributing to their pensions and making provisions for their retirement by allowing an increased level of funds, whilst also increasing the potential tax reliefs available.
- Money Purchase Annual Allowance
The Money Purchase Annual Allowance, currently £4,000, was introduced with pension freedoms and limits the amount of money which can be contributed to a money purchase pension once pensions have been flexibly accessed. From 6 April 2023, this allowance is due to increase to £10,000, those impacted by the Money Purchase Annual Allowance will have the ability to increase their pension savings moving forward.
- Tapered Annual Allowance
Since April 2020, people with taxable income over £240,000 have had their annual allowance for that tax year restricted. This means that for every £2 of income they have over £240,000, their annual allowance is reduced by £1. The maximum reduction is currently £36,000, and anyone with income of £312,000 or more has an annual allowance restricted at £4,000.
From the 6 April 2023, the level of taxable income before the reduction starts will increase to £260,000, whilst the tapered annual allowance will not go below £10,000. Moving forward, individuals who earn £312,000 would have a tapered annual allowance of £34,000, an increase of £30,000 from the current rules. Taxable income would have to be £360,000 or more for the tapered annual allowance to be £10,000.
This change is good news for those who have been or will be impacted by the Tapered Annual Allowance, by increasing the amount you will be able to contribute to your pensions moving forward.
- Lifetime Allowance
The Lifetime Allowance is the overall limit of pension funds an individual can accrue during their lifetime before a Lifetime Allowance tax charge applies. Currently the standard Lifetime Allowance is £1,073,100, with any pension benefits over this amount being subject to a tax charge of either 25% or 55% depending on how the benefits are accessed.
From April 2023, the Lifetime Allowance tax charge will be removed, resulting in nobody facing any Lifetime Allowance tax charges from April 2023. Although, any lump sum payments due to ill-health or payment on members death could still be liable for a tax charge at the individual’s marginal rate.
The Lifetime Allowance will be abolished entirely from April 2024.
Whilst this was introduced to incentivise skilled individuals such as NHS clinicians to continue or return to work, this change is a massive relief for all people with pension savings in excess of the current Lifetime Allowance (or those with protected Lifetime Allowances) and means nobody will be penalised for accumulating large pension entitlements.
For those individuals affected your planner will be in touch once we have completed our checks.
- Tax Free Cash Entitlement
Individuals may be able to receive a tax-free lump sum when they become entitled to their pensions benefits. The maximum amount available is currently 25% of their available Lifetime Allowance at the time the benefits are taken.
Due to the removal of the Lifetime Allowance, an upper monetary tax-free cash payment of £268,275 (25% of the current lifetime allowance) will be introduced. Those individuals who already have protected rights to take a higher tax-free cash entitlement will continue to be able to do so. There is no real change to this, this simply is how the tax-free cash entitlement will work moving forward with the removal of the Lifetime Allowance.
For smaller businesses, Mr Hunt has increased the Annual Investment Allowance to £1m, meaning “99% of all businesses can deduct the full value of all their investment from that year’s taxable profits” Mr Hunt said.
Additionally, Mr Hunt has introduced “full expensing”, for the next three years, with an intention to make it permanent as soon as the government can responsibly do so. This means that every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits. Mr Hunt says this will cost the Treasury approximately £9bn per year for the next three years.
Whilst this is positive for businesses, it feels a little like giving with one hand and taking with the other, as corporation tax will increase from 19% to 25%, which will generate approximately an extra £17bn.
Child Care Costs
Another area of speculation ahead of the budget was the subject of free childcare. It has been confirmed that the government will provide 30 hours of free childcare for every single child over the age of 9 months in eligible households where all adults are working at least 16 hours.
This will be worth on average £6,500 every year for a family with a two-year-old child using 35 hours of childcare every week and reduces childcare costs by nearly 60%. However, this will not be immediate, with working parents of two-year-olds being able to access 15 hours of free care from April 2024, from September 2024, the 15 hours will be extended to all children from 9 months up, and then from September 2025, all eligible working parents of children aged 9 months up to 3 years will be able to access 30 free hours per week.
This is a great benefit for young parents who are facing the costs of childcare and want to return to work.