20 March 2023
Personal Tax Planning,
Wealth planning & Private client
Despite predictions that the lifetime allowance would be increased in the Spring Budget, the Chancellor went against expectations and abolished it altogether.
The lifetime allowance (LTA) is the maximum amount of tax-relievable pension savings that an individual can build up over their lifetime. The cap was set at £1.073 million, meaning any further pension contributions would be subject to a tax charge on the amount above the allowance.
In the Spring Budget, the Chancellor announced that the lifetime allowance charge would be removed from 6th April 2023 and fully abolished from April 2024. The annual tax-free allowance will also be increased from £40,000 to £60,000 per year.
Watch the full video below:
Addressing workforce shortages
The pension tax reform aims to address workforce shortages, which have affected around 15 percent of businesses since October 2021.
Jeremy Hunt had previously shared his ambition to get early retirees back to work. The latest announcement is believed to target senior NHS staff in particular, who have opted for early retirement rather than triggering tax charges.
As Hunt said in the Budget:
It will stop over 80 percent of NHS doctors receiving a tax charge, incentivise our most experienced and productive workers to stay in work for longer, and simplify our tax system, taking thousands of people out of the complexity of pension tax.
Haines Watts’ tax experts share their views
The tax team at Haines Watts have had mixed views on the announcement.
Ian Haynes, Tax Director at Haines Watts Scotland, described the pension changes as “good ideas” that would serve people “adequately”, but argued that there was much more that could have been done to help a larger percentage of people.
Nicola Goldsmith, Head of Private Client at Haines Watts, agreed. While getting more doctors back into the NHS is certainly a good thing, the changes will affect a relatively small group of people so it could be “quite an expensive way” of addressing shortages.
Nicola also highlighted the decision to remove the LTA first, rather than abolishing it straight away:
One wonders why it's not being abolished immediately, but only removed for the next year. That indicates that there might potentially be a U-turn – I don’t know. But it just seems to be a curious choice of language.
The inheritance tax advantages
There are also implications to consider from an inheritance tax perspective. Pensions aren’t normally considered to be part of your taxable estate, so inheritance tax doesn’t apply when you pass on your pension savings.
Abolishing the LTA cap will make it more tax efficient to keep savings within a pension plan to pass on to family members at a later date.
If you've got a lot of money in a pension, that's not subject to inheritance tax. So if you've got, say, a two-million pound pension, you've got an extra million pounds out of the UK inheritance tax net. Well, that's a £400,000 saving.
The beneficiaries will still have to pay UK tax on whatever they withdraw at their marginal rate of tax. But if they're a 20 percent taxpayer and they draw a pension over a number of years, then clearly there's a huge tax advantage there.
Learn more about pension changes
If you’ve got a question about how the Spring Budget will impact your pension, our friendly team is here to help. Find your nearest Haines Watts office or send us a message using our contact form.