What does the Spring Budget 2023 mean for you?

It's that time of year again when the red briefcase gets held aloft outside Downing Street and we (well some of us) sit with bated breath wondering what the next big idea will be from the Treasury. ?

So, what did Spring 2023 have in store and what does this mean for your financial planning? The headline announcements were:?

-?????An increase to the annual limit savers can put into pension and receive tax relief. This has increased from ￡40,000 to ￡60,000.?

-?????the complete abolition of the Lifetime Allowance (LTA) - removing the potential for up to 55% taxation on pension benefits over ￡1.073m.?

-?????Tax Free Cash entitlement will be limited to ￡268,275; 25% of the current LTA.?

-?????The Money Purchase Annual Allowance (MPAA) applying to anyone who has taken flexible benefits from their pensions already will increase from ￡4,000 to ￡10,000?

-?????Corporation Tax (as previously planned) will increase to 25% for businesses with turnover over ￡250,000. ?

-?????Extension to free childcare for working parents is being expanded to 1- and 2-year-olds. This will be fully implemented by 2025.?

-?????Government subsidies for energy bills are being extended for a further 3 months.

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Whilst already announced, there are other changes taking effect from the start of the 2023/24 tax year:

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-?????The Capital Gain Tax (CGT) exemption is being reduced to ￡6,000 for individuals and ￡3,000 for Trusts. These figures will be further halved at the start of the 2024/25 tax year to ￡3,000 and ￡1,500 respectively.

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-?????The additional rate tax threshold is being reduced from ￡150,000 to ￡125,140, bringing more workers into 45% Income Tax.

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-?????The amount of Dividends that can be earned tax free will be reduced to just ￡1,000 and again to ￡500 in 2024/25.

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These changes will no doubt separate some into “Budget Winners” and “Budget Loses”. However, there are many reasons to reassess your financial planning to make sure you are giving yourself every opportunity to be in the former category.

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Business Owners

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The effect of this budget is that, for Business Owners, the strategy for profit extraction is increasingly important. Increases to Corporation Tax and a reduction to the Dividend Allowance only serve to enhance the benefits available through pension contributions.

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Company pension contributions become a deductible expense for Corporation Tax, therefore previously the Tax benefits to fully utilising the ￡40,000 annual allowance were capped at ￡7,600 (19% of ￡40,000). However, in the 2023/24 tax year, business owners can increase the value of the Tax benefit to ￡15,000 (25% of ￡60,000) subject to affordability.

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High Earners and the Personal Allowance

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The Personal Allowance currently allows individuals to earn their first ￡12,570 of income with paying any Income Tax. However, this benefit tapers away by ￡1 for every ￡2 earned over ￡100,000. This means that those who earn over ￡125,140 lose their personal allowance altogether.

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From April 2023, they will now also start paying an extra 5% of Income Tax on the surplus.

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The benefits of pension planning to fully recover the Personal Allowance were reserved for those earning between ￡100,000 and ￡140,000 due to the available annual allowance, however, these benefits have now been extended to those earning up to ￡160,000, again subject to affordability.

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Cashing in Gains and Registering Losses

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An often over looked area of Tax Planning is the utilisation of the CGT exemption. Typically used by those selling Buy-to-Let property, directly held shares or other unwrapped investments to provide each individual up to ￡12,300 of gains each year which can be realised tax free. From April 2023 this is exemption is more than halving to just ￡6,000 and then halving again for the 2024/25 tax year.

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Those who are considering selling assets may well wish to consider the timing of these sales to try and realise there gains before the tax year ends. This could give savings up to ￡1,764.

Equally as important is the registering of losses. Where certain assets are sold at a loss, those losses can be registered with HMRC and offset again future gains. Effectively topping up the ever-reducing CGT exemption for future years.

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After a tumultuous year in the stock markets, 2022 will have left many holding unwrapped investments which are currently valued at a loss. Investors may want to give thought to whether those losses can be used to enhance their tax position in the future.

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Pensions

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Finally, our current Chancellor has opened the door for many savers who are at the limits of pension savings to reap the Income Tax and Inheritance Tax benefits of pensions more than has been previously possible.

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However, and quite expectedly, the Labour Party have said that the changes to the Annual Allowance and Lifetime Allowance would be reversed should they get into power. Whilst there is a great opportunity for some, it should not be taken for granted that it will last forever.

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Nonetheless the changes that are taking effect from April 2023 are significant and for the right individuals can hugely alter the what the future may look like financially.

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The value of investments are linked to the underlying funds selected and their value may fall as well as rise. You may get back less that you initially invested.

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Tax rates are subject to change and will be different from individual to individual.