Although the budget felt a bit light on content from a personal tax perspective, there was still some interesting stuff, although not a total surprise if you had followed the news over the weekend!
The biggest change since A Day?
Who would have thought that a change to pension tax would incentivise people to work? Well, for some, this will be the case – changes to the annual allowance and the lifetime allowance will mean that those extra years in work will not penalise their pension pot.
The annual allowance relates to the maximum gross contributions which can be made to an individual’s pension scheme in a tax year without suffering a tax charge. It is currently set at £40,000 and is reduced by £1 for every £2 that an individual’s adjusted income exceeds £240,000 (subject to a minimum annual allowance of £4,000) – any pension contributions exceeding the annual allowance are taxed at their marginal rate.
The lifetime allowance is the maximum value that an individual’s pension pot can reach without suffering a tax charge. It is currently set at just over a million and if exceeded, tax charges of up to 55% can arise when funds are withdrawn.
From 6 April 2023, the annual allowance will increase to £60,000, the adjusted income threshold to £260,000 and the minimum allowance to £10,000. Although not a significant shift in the limits (considering that the annual allowance was set at £215,000 when first introduced), it will help to reduce the impact of these rules.
More significant was the change to ensure that nobody will suffer the lifetime allowance charge from 6 April 2023, with the lifetime allowance being abolished at a later date. It is not all that simple though, as the maximum lump sum amount that can be withdrawn from the pension pot will be capped at £268,275 (being 25% of the current lifetime allowance limit) unless pension protection is already in place.
The focus of this is clearly aimed towards high paid professionals, as the vast majority of the potential over 50’s workforce which the Chancellor is trying to retain or woo back to work will not be impacted by this – a view held by several commentators and the opposition (who have stated their plan to reverse this).
Extended tax relief on separation
Although previously announced, a significant change which comes into effect from 6 April 2023 is around the transfer of assets on divorce for capital gains tax purposes.
Currently, when a couple (married or civil partners) separates, unless assets transfer during the year of separation, significant capital gains tax charges can arise – when emotions are running high, the last thing being considered are the tax rules!
The changes coming into effect allow for the transfer of assets to occur without capital gains tax so long as they take place within three years of separation or any period of time if they are subject to a formal divorce agreement. As well as this extension, where one party retains an interest in the matrimonial home (or transfers this and is entitled to a proportion of the proceeds on a subsequent sale) then they will be able to claim private residence relief on the sale, so that no capital gain tax charge will arise (although we await the draft legislation to understand the detail of this).
Round up of other matters
Two other capital gains tax tweaks worth a brief mention are the extension of roll over relief for land to include land owned by LLPs with effect from 6 April 2023 (which currently only applies to individuals) and that from 6 April 2024, individuals will be required to separately identify crypto asset disposals on their tax returns.
And finally, from 6 April 2024, only land situated in the UK will qualify for agricultural property relief and woodlands relief for inheritance tax purposes – so land situated in the European Economic Area, the Channel Islands and the Isle of Man will no longer qualify.
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