Spring Forward, Fall Back

Rishi Sunak’s re-election strategy was clear to see in Jeremy Hunt’s second budget. Here are the headlines and key takeaways from yesterday’s announcement:

• Inflation - falling to 2.9% this year. Growth - UK to avoid a 'technical' recession.

• Increase in workforce targeted via childcare and changes to benefit regime.

• Business tax - Corporation Tax will rise to 25% in April, up from 19%.

• No inflation uplift to personal allowances. Significant real terms increase in tax.

• Abolition of LTA and increases to AA and MPAA.

The Big News

As if by magic, Jeremy Hunt revealed a pair of statistical rabbits on his second outing as Chancellor. To start, the Office of Budget Responsibility now believe the UK will avoid a technical recession in 2023, and we’ll see the economy contract by only 0.2% this year. They forecast inflation will fall to 2.9% by Christmas. This is very good news, but not an end to all our economic troubles.

A big talking point for the financial services sector was the abolition of the Lifetime Allowance and the increase in the pension contribution Annual Allowance to £60,000.

Inflation, Debt, Growth

Sunak plans to fight the next General Election on a track record of halving inflation, promoting growth and cutting public sector debt. On the face of it, with the positive news coming from the economy, he’s in good shape. And with this extra spending headroom, Jeremy Hunt announced a much longer list of spending initiatives than we’ve seen in quite a while. The list includes £11bn on defence, £8bn on regional transport, £20bn on carbon capture, £2.5bn on research into Artificial Intelligence and over £1bn on childcare. The detail in the list and the vision are impressive. But what can his attempts to improve competitiveness and productivity do within 18 months that might change the outlook of the electorate towards their personal situations?

Getting People Back To Work

Central to the growth strategy is the expansion of the workforce. A variety of measures have been announced to achieve this, around childcare, guarantees of wrap around provision at the start and end of the school day, apprenticeships for older people and of course the pension changes mentioned already. There are new schemes to ensure the benefit system won’t disincentivise the disabled from working and a tougher approach to those on benefits refusing reasonable job offers. The target is a bigger, more productive workforce to drive a bigger economy and a bigger tax base.

Business Taxation

Many smaller businesses are dreading the corporation tax rise to 25% in April. There was no change in this measure - but it is being blunted with £30bn in tax relief incentives to encourage businesses to make capital investment into plant, machinery and R&D. These are welcome - if you have the cash to spend and/or the confidence to borrow in expectation of a return. Both seem in relatively short supply, given the consumer is drawing in their horns.

Cost of Living Crisis and Personal Tax

To combat the severe impact of inflation, particularly in energy costs, the energy price subsidy of £67 a month is being extended to June at a cost of £3bn. What is not on offer is any uprating of personal allowances to reflect inflation. This represents a huge increase in the personal tax burden from this April and into the future. It also forms part of the jigsaw around public sector pay, to which the Chancellor made no reference. Clearly, with the new expectation that inflation will fall sharply, there is hope for additional leverage in those negotiations. Their outcome will have a considerable bearing on whether the fiscal plan stays on track.

In Summary

The big talking point (and for many the only talking point) from yesterday was pensions and I have already covered this in my article here. There will be finer details to emerge from The Finance Bill and so I will provide a full update on this when everything is known.

As for everything else, not really much to report and I expect the real fireworks to be at the next pre General Election Budget which could well see a flurry of tax cuts in an attempt to buy votes that will either work or leave Labour having to unwind almost immediately.

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Appendix

Income Tax

Income tax rates from 6 April 2023 were previously announced. For details, see:

There were no new changes announced in relation to the income tax personal allowance(s) nor to the income tax bands.

This means the income tax personal allowance will remain at £12,570 until 5 April 2028.

The 0% starting rate band for savings income will remain at £5,000 for 2023/24.

The higher rate threshold will remain at £50,270 (made up of the £37,700 threshold plus the personal allowance of £12,570) until 5 April 2028.

The income tax additional rate threshold will be £125,140 from 6 April 2023.

The higher rate and additional rate thresholds apply to taxpayers in England, Wales, and Northern Ireland for non-savings and non-dividend income and apply UK-wide for savings and dividend income.

The basic rate of income tax will remain at 20%, the higher rate will remain at 40% and the additional rate will remain at 45%. The basic rate of tax applicable to dividends will remain at 8.75%; the higher rate will remain at 33.75% and the additional rate will remain at 39.35%.

The dividend allowance will be £1,000 from 6 April 2023 and will reduce to £500 from 6 April 2024.

National Insurance

National Insurance contributions from 6 April 2023 were also previously announced. To confirm, this means:

• Class 1A and 1B employers pay 13.8% on earnings over £9,100.

• Class 1 employees pay 12% on their earnings between the primary threshold and the upper earnings limit; between £12,570 and £50,270.

• Class 1 employees pay 2%, on their earnings above the National Insurance contributions upper earnings limit.

Inheritance Tax

The inheritance tax threshold will be maintained at the existing level of £325,000 until April 2028.

Pensions

Lifetime Allowance

The lifetime allowance charge which applies to crystallisations of pensions over the lifetime allowance is removed from 6 April 2023. This will be included in the Spring Finance Bill 2023. The lifetime allowance will be abolished from April 2024 - the legislation for this will be in a future Finance Bill.

The maximum pension commencement lump sum for those without protections will be retained at 25% of the fund up to a maximum of £268,275 (25% of the lifetime allowance of £1,073,100). The figure of £268,275 will be frozen thereafter.

The lifetime allowance impacts on several other lump sums. The individual must have lifetime allowance available for the following lump sums to be authorised payments: pension commencement lump sum, serious ill-health lump sum, uncrystallised funds pension lump sum and winding up lump sum.

This also removes the need for individuals to rely on protections from previous reductions to the lifetime allowance.

The following benefits that are currently subject to a 55% tax charge on excesses above the lifetime allowance will instead be subject to income tax on the excess at the individual’s marginal rate:

• lifetime allowance excess lump sum

• serious ill-health lump sum

• defined benefits lump sum death benefit

• uncrystallised funds lump sum death benefit

Annual Allowance

As widely rumoured, from 6 April 2023, the annual allowance has been increased from £40,000 to £60,000, the first increase since 6 April 2014. Carry forward of unused annual allowance from the three previous tax years will still be available.

Tapered Annual Allowance

The tapered annual allowance which reduces the amount of annual allowance available for high income individuals has had the adjusted income increased, although the threshold income remains at the present level. The limits are now:

Threshold income - £200,000

Adjusted income - £260,000 (up from £240,000)

The minimum tapered annual allowance increases from £4,000 to £10,000.

Money Purchase Annual Allowance

The money purchase annual allowance, the maximum amount that, when triggered, can be paid to money purchase pension plans without a tax charge was widely seen as a disincentive for individuals who have retired to return to work. From 6 April 2023 it’s been raised from £4,000 to its original value of £10,000.

ISAs

The adult ISA annual subscription limit for 2023/24 will remain unchanged at £20,000.

The junior ISA annual subscription limit for 2023/24 will remain unchanged at £9,000.