Spring Budget Entrée

Autumn Statements often tread one of two paths: they either brim with impactful announcements awaiting further details, or they unfold quietly, with significant consultations and changes slipping through unnoticed.

This year's firmly belongs to the latter category.

Characterised more by its low-key nature than by headline-grabbing content, it seemed to set the stage for a more impactful Spring Budget.

The notable reduction in National Insurance contributions did manage to capture public attention, but for financial planners, the key takeaway was the finer details surrounding the Lifetime Allowance (LTA) abolition.

Beyond this, the Statement offered little in terms of groundbreaking changes.

The adjustments for ISA subscribers, the subtle shifts in the EIS regulations, and the introduction of pension consultations, including the promising 'Pension Pot for Life' concept, felt more like preparatory steps rather than definitive actions.

In essence, this Autumn Statement can be likened to an appetiser – offering just enough to engage interest without fully satisfying the appetite for substantial reform.

The financial community is now poised for the Spring Budget, which is expected to reveal more significant tax reforms and is anticipated to play a critical role in shaping the next Conservative manifesto.

Overview

The Statement, titled "Autumn Statement for Growth," introduced 110 measures (count them!) aimed at spurring business investment, boosting employment, and raising GDP.

There was no cut to Inheritance Tax (IHT) as was widely speculated. It appears the Chancellor has listened to his MP colleagues who warned against being seen to give a tax cut to the wealthiest individuals (only around 4% of individuals paid IHT over the £325,000 allowance last year) in the midst of a cost of living crisis.

I won’t cover all 110 obviously, but I’ve highlighted the most important below and gone into more detail later on some of the more substantial.

The key measures were:

• A reduction in employee’s Class 1 National Insurance Contributions (NICs) from 12% to 10%, effective from 6th January 2024.

• The abolition of Self-Employed Class 2 contributions.

• A decrease in Self-Employed Class 4 contributions from 9% to 8%.

• Enhanced flexibility in ISA, JISA, and LISA accounts, though with frozen input limits.

• Confirmation on finer details of the Lifetime Allowance abolishment.

• An increase in the investment limit for SEIS and an extension of the sunset clause for VCT and EIS to 2035.

• A consultation on legal rights for employees to direct employer pension contributions into existing pension pots.

• The State Pension is set to increase by 8.5%, one of the largest cash increases to date.

• The National Living Wage will rise to £11.44, with the eligible age reduced to 21.

National Insurance Changes

The most prominent change, and rightly the headline of the statement, was the reduction in National Insurance contributions.

The Chancellor announced a substantial cut, with the main rate for Class 1 National Insurance Contributions (NICs) dropping from 12% to 10%. This change, effective from 6 January 2024, represents a significant saving for employees, particularly those earning up to the higher rate threshold.

For an individual earning £50,000 per annum, for example, this reduction could translate into an annual saving of up to £754.

However, it's worth noting that for those utilising salary sacrifice schemes, the lower rate might result in reduced savings despite its overall positive impact.

The Chancellor also turned his attention to the self-employed, announcing the abolition of Class 2 NICs for those with profits exceeding £12,570 from 6 April 2024. This will not impact their right to state benefits and given the rate was planned to increase to £3.70 next year, this represents a saving of up to £192 over a year. 

Also, Class 4 NICs rate will see a reduction from 9% to 8% for profits between £12,570 and £50,270, effective from the same date. This adjustment is estimated to save the average self-employed person with profits of £28,200 per annum approximately £350 in the 2024/25 tax year.

Pensions - Lifetime Allowance Abolition

In a previous blog post, I reported on the draft legislation unveiled on 18 July 2023, which focused on the abolition of the Lifetime Allowance (LTA).

While that post covered the essentials, some crucial details were still pending at that time. Following the Autumn Statement, we've received further information that sheds light on these outstanding points.

A lot of the new information addresses complex technicalities that might not capture everyone's interest – they're more for pension boffins like me. These include specifics on trivial commutation lump sums, transitional provisions, and new reporting requirements for pension schemes.

But there are two key updates that are worth spending a little more time on.

First, there's a significant reversal from a previous position. Second, a potential loophole that was a topic of much speculation seems likely to be closed off.

 Beneficiary Drawdown and Annuity Payments

In a positive reversal from earlier proposals, the government has clarified the tax treatment of death benefits for pensions, particularly for individuals who die before the age of 75.

Initially, there was uncertainty surrounding the taxation of death benefits taken as income, such as beneficiary drawdowns or annuities. The original draft implied that these benefits might be subject to income tax.

However, following consultations and further clarification, the government has confirmed that the tax-free treatment of these benefits will continue.

This means that if a pension scheme member dies before 75, the beneficiaries can receive drawdown or annuity payments without these being taxed, just as they are currently.

This decision maintains the existing advantageous tax treatment and is a welcome development for individuals planning their estates and pensions.

It's important for beneficiaries to be aware that if a pension scheme cannot offer an income option, they may have to receive benefits as a lump sum, which could have tax implications if it exceeds the available Lump Sum Death Benefits Allowance (LSDBA).

Therefore, keeping nominations up to date and understanding the options available within a pension scheme remain crucial for effective financial planning.

 Tax Treatment for Overseas Pensions

With the abolition of the LTA, there was uncertainty about how this would affect transfers to Overseas Pension Schemes (OPS). Previously, these transfers were tested against the LTA, with any excess amount taxed at 25%. However, with the LTA charges currently set to 0%, the question arose about how such transfers would be managed under the new system.

To address this, the government is introducing a new Overseas Transfer Allowance (OTA). This allowance, set at £1,073,100 – equivalent to the current lump sum and death benefit allowance – will govern the transfer of pensions to OPS. Transfers exceeding this allowance will attract a 25% overseas transfer charge.

What remains unclear is how this new allowance will interact with other allowances, like the Lump Sum Allowance (LSA). For instance, it's not yet known if taking a lump sum from the OPS will count towards using up the LSA, or if transferring an amount equal to or higher than the Death Benefit Allowance will consume this allowance. This could potentially offer pension savers an opportunity to benefit from both allowances.

Further clarification and details are expected to be provided in the forthcoming draft legislation.

ISA Reforms

We saw several tweaks to the ISA system. While these changes aren't exactly groundbreaking, they do bring some noteworthy improvements in terms of administration and flexibility for ISA holders.

As for the future, I expect ISAs will be one of the first targets for overhaul from a new Labour Government. 

Here are the ISA announcements in full:

• Multiple Subscriptions to ISAs of the Same Type: Starting from April 2024, savers will be allowed to subscribe to multiple ISAs of the same type within the same tax year. This change introduces a new level of flexibility, enabling individuals to spread their investments across various ISA providers or to take advantage of different investment opportunities throughout the year.

• Partial Transfers Between Providers: Another significant change is the introduction of partial transfers of ISA funds between providers within the same tax year. This amendment allows savers to be more responsive to changing market conditions or to take advantage of better rates or services offered by different providers without having to transfer their entire ISA balance.

• Easing Restrictions on Dormant ISAs: The requirement to reapply for an existing dormant ISA will be removed from April 2024. This simplification will make it easier for individuals to reactivate their ISAs without going through a cumbersome reapplication process.

• Expansion of the Innovative Finance ISA: The Innovative Finance ISA will be expanded to include Long-Term Asset Funds (LTAFs) and open-ended property funds, starting from April 2024. This expansion broadens the range of investment options available within this ISA category, potentially offering higher returns and diversification benefits.

• Fractional Shares as Eligible Investments: The government also plans to permit certain fractional shares contracts as eligible ISA investments. This move could democratise access to higher-priced stocks, making it easier for smaller investors to participate in the equity market.

• Harmonisation of Account Opening Age: The account opening age for all adult ISAs will be standardised to 18 years from April 2024, simplifying the process and making it consistent across different types of ISAs.