Anyone hoping for sweeping reform, or really anything of substance, is likely to feel somewhat deflated by the announcements made. Indeed, there was little to spark any real excitement. On the other hand, those wanting stability and adherence to the mantra ‘boring is best’ may well have been pleased by the lack of personal tax measures, particularly the silence regarding increases to the capital gains tax rates (which have been speculated about for several years now).
The key personal tax measures announced were reforms to pension tax reliefs.
Pension tax reforms
The chancellor put forward measures to increase the amount individuals can save into their pension in the belief that this can in part help to address the UK’s low levels of productivity by keeping individuals in employment for longer and incentivising the ‘economically inactive’ (especially the over 50s) back into work.
Arguably the reforms do little more than tinker around the edges of the existing legislation, rather than fundamentally reform the taxation of pensions. The following measures will be introduced from 6 April 2023.
- The pension contributions annual income tax allowance is to increase from £40,000 to £60,000. In addition, the annual money purchase allowance for pension contributions by existing pensioners and the minimum tapered annual allowance will increase from £4,000 to £10,000.
- The lifetime allowance charge will be removed from April 2023, and the pension lifetime allowance abolished (the latter measure will take effect from April 2024).
- The income level at which the pension contributions annual income tax allowance will be tapered will increase from £240,000 to £260,000 from 6 April 2023.
A more sceptical view may be that the measures have simply been designed to help the struggling NHS system, by preventing NHS doctors from seeking to retire early due to existing tax policies. However, many individuals will benefit from the ability to pay higher pension contributions without incurring unwelcome tax charges. Only time will tell how effective the measures are.
Hidden in the detail following the announcements, the pension commencement lump sum allowance (commonly known as the tax-free lump sum) will remain at 25% of the available pension fund, subject to a maximum of £268,275 (ie 25% of the current lifetime allowance of £1,073,100. As this, in time, may be less than a quarter of the value of a pension, it may be an incentive to keep funds within the pension to pass on as part of a wider inheritance tax planning strategy. Rather than saving pension funds for retirement, those with significant assets outside their pension may rely on spending other capital rather than drawing down income from their retirement pot.
Whilst the reforms may improve productivity – particularly for NHS workers - they are also likely to increase wealth inequality.
Capital gains tax
The measures to be included in the Spring Finance Bill include legislating announcements, to counter tax-avoidance, made in the chancellor’s last Autumn’s Statement, including closing planning previously available whereby non-domiciled taxpayers could restructure their UK investment holdings into non-UK based companies and obtain tax free income and gains from the non-UK company, and a perceived loophole of using unconditional contracts.
As previously announced in July 2022, the government will also introduce legislation with effect from 6 April 2023 that extends the ‘no gain, no loss’ principle for capital gains tax purposes to the transfer of all assets between separating spouses and civil partners for up to three years after the tax year they cease living together, and all transfers of assets undertaken as part of a formal divorce agreement.
Trusts and estates
The tax regime for trusts and estates has become more complicated over the past 20 years, and there is an increasing number of trusts and estates that now have a significant administrative burden, including reporting to HMRC for income tax, capital gains tax and inheritance tax purposes, as well as an annual return or declaration under the trust registration service.
The details set out in the various Spring Budget documents include measures intended to make reporting for smaller trusts simpler, as any trust or estate with income of less than £500 per annum will now no longer need to be reported on a tax return. These measures mean that beneficiaries will also not need to pay tax on income below these levels either.
One complication of the income tax regime for discretionary trusts has been the standard rate band, where income of less than £1,000 was taxed at a lower rate. This rate band is to be abolished in its entirety, which, coupled with the new exemption for income under £500, should go some way to reducing the compliance burden for trustees.
Income tax
The annual subscription limit for individual savings accounts (ISAs) is frozen at £20,000 for the 2023/24 tax year and the limit for Junior ISAs and child trust funds will also remain at £9,000.
The starting rate limit for savings income is kept at £5,000 for the 2023/24 tax year, which is in line with the freeze on rates and allowances previously announced at the 2022 Autumn Statement.
In more positive news, the amount of income tax relief available to foster carers and shared lives carers will increase from 6 April 2023. The threshold above which care income will be taxed is to increase from £10,000 to £18,140 per year, plus £375-£450 (currently £200-£250) per person cared for per week, depending on their age, for the 2023/24 tax year, following which the thresholds will increase in line with the consumer price index.
Elective accruals basis for carried Interest
UK resident private equity managers in receipt of distributions of carried interest are sometimes liable to tax in other jurisdictions. The timing of the recognition and charging of the carried interest to tax may differ between jurisdictions, making it difficult to obtain relief and resulting in double taxation. The government has therefore announced that individuals may elect for the carried interest to be taxed at an earlier time in the UK than under current rules to enable them to secure double tax relief. This change is backdated to 6 April 2022 and affected individuals should review their 2022/23 filing positions accordingly. This issue can be particularly relevant to UK residents who are also US citizens or Green card holders. By allowing UK residents to pay tax earlier on their carry, aligning with the tax point in the other jurisdiction, it is hoped that the claiming of credits will become easier. Further details will be contained in the Finance Bill expected on 23 March.
Other tax announcements
From the 2024/25 tax year, all amounts received in respect of cryptoassets will need to be identified separately on a taxpayer’s self-assessment tax return.
Tax relief for non-UK charities and their donors and suppliers will be withdrawn from 15 March 2023, although qualifying charities in the European Union and European Economic Area will have a transitional period until April 2024.
Non-tax personal measures – reform to the childcare system
The childcare system is to be reformed to provide 30 hours of free childcare a week for 38 weeks a year to all eligible households, for all children over the age of nine months until they start school. The idea behind the measure is that it will help parents who wish to return to work to afford to do so. Eligible households will broadly be those where both parents work at least 16 hours a week. To ensure such childcare is available, this measure will be phased in, with all two-year-olds qualifying for 15 hours of free childcare from April 2024, and those aged over nine months qualifying from September 2025.
