The Spring Budget 2023 and why pensions may help
The statement will be made in the House of Commons on Wednesday 15th March 2023, alongside a forecast from the Office for Budget Responsibility (OBR). These forecasts assess the impact of government policy decisions and economic developments. It is important that this budget has been effectively costed if we do not want to see a reaction similar to the one we experienced in September 2022 when Liz Truss was our Prime Minister. It is also important that the budget allows for the country and the people within it to work and enjoy a certain quality of life so it is a fine balancing act, difficult to get right. A government’s success and future election aspirations depend on the chancellor balancing the sums and keeping the people on side.
The lifetime allowance with regards to pensions is the limit on how much you can save in to your pension pot before being hit with a tax charge. In 2022-23, the lifetime allowance remained at ￡1.073 million?and it is currently frozen at this level?until 2026. (Some people with older pension pots may have applied for enhanced or fixed protection from this limit but for the bulk of the population it is the ￡1.073 million)?When we look at the average person and their pension on retirement this allowance seems?generous enough a million pounds in February 2022 is still a significant sum but with the spiralling cost of living, inflation, longevity and the value of money this may need to be reviewed in the coming years to encourage people to continue to save sufficiently for their retirement and also to balance out other potential changes to retirement goals such as further increases to state pension ages. (Private pensions currently can be drawn from age 55 and are set to be changed to being able to be accessed 10 years prior to state pension age from 2028.
The age at which you can access your state pension is currently set at 66 for both men and women. It's due to gradually increase to 67 by 2028, before slowly going up to 68 between 2044 and 2046.?However, there are reports that a review into the state pension age will recommend the increase to 68 be moved forward to the mid-2030s, and that this change could be announced in the Spring Budget. It means millions of workers born in the 1970s may have to push back their retirement plans. This makes sense for the country in terms of the cost to the government and reduces the burden on the state created by people living longer also. Private pensions can be used to bridge this gap and the sooner money starts to be saved the longer it has to grow and facilitate the financial goal.
In addition there are changes forecast?to the earnings amount that would bring someone into the additional rate tax bracket of 45p in the pound for employed and 39.35p in the pound for self employed taking dividends in year 2022/23. The threshold?will probably be reduced for tax year 2023/24 from ￡150,000 currently?to ￡125,140, we will find out next month. This is especially significant to landlords who are taxed on gross rent as part of their overall income and then can only claim relief on mortgage interest payments at 20%.
From April 2023 onwards, the main rate of Corporation Tax will rise from 19% to 25%. Although the current 19% rate will still apply if your profits are ￡50,000 or less, your company will pay more tax on profits above this level.?It is slightly more complicated than this as From 1st April 2023, the existing flat 19% rate will be replaced as follows:
At the same time as this impacts the new ‘Associated Companies’ rules also come into effect in April 2023.
This means that if two or more companies are ‘related’ in some way (usually by common ownership), then the new ￡50,000 and ￡250,000 thresholds are reduced according to the number of associated companies involved.
Pension contributions are currently an effective way of not only saving for retirement but also?improving tax efficiency. For instance a company making ￡60,000 profit before tax in 2023/24 that paid?￡10,000 contributions into a company pension/s would reduce the company profit to ￡50,000 and retain the corporation tax bracket of 19%. The ￡10,000 contribution into the pension would not incur any tax charge so would benefit from net credit of ￡10,000 to be invested for retirement.
Example:
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Company profits of ￡60,000 in 2022/23 would incur Corporation tax charge of ￡11,400 for the same profit in 2023/24 this would be ￡12,150 so an extra ￡750
￡100,000 profit CT?goes from ￡19,000 2022/23 to ￡22,750 2023/24?and ￡200,000?profit CT from ￡38,000 to ￡49,250 respectively . From 2023 people with small companies really need to look at monthly or quarterly managed accounts to understand their financial position.
What if someone owns two companies ?
The threshold is reduced to ￡25,000 for 19% tax and ￡125,000 for effective 26.5% tax per company (the next ￡100,000)
Four companies?
The threshold is ￡12,500 for 19% tax and ￡62,500 for 26.5% tax per company etc.
With reductions to CGT thresholds?and dividend allowances ISAs at ￡20,000 per year are tax efficient ways of investing money that has already been taxed as any growth is non taxable and non reportable. In a time when our finances have never been more squeezed the need for financial advice has never been more important. Don’t wait until your 2023/24 tax return to find out the impact these changes will have on your finances, be proactive and engage with your accountant and financial adviser and encourage them to communicate with each other.
The current savings allowance for interest from savings is separate from any ISA allowance you may have. The amount of allowance depends on the type of taxpayer you are: basic rate taxpayers (20%) can earn ￡1,000 in tax-free interest each year. higher rate taxpayers (40%) can earn ￡500 in tax-free interest each year and additional rate tax payers have no allowance. After this you will pay tax as earned income on any surplus so high levels of cash savings have a degree of risk from an inflation as well as a taxation perspective.
Sandra Antoniou?20.02.2023