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The Budget surprise: changes to the pension tax rules

Written by admin on . Posted in Budget, Pensioners, Pensions. No Comments on The Budget surprise: changes to the pension tax rules

New measures affecting pension allowances announced in the March Budget could mean your retirement planning strategy needs to be reviewed.

If Jeremy Hunt did produce a ‘rabbit-out-the-hat’ in his Spring Budget, it was the announcement of the effective abolition of the pensions lifetime allowance (LTA) from 2023/24. Since 2006, the LTA has been a cornerstone of the pension tax rules, effectively setting a ceiling on the tax efficient value of all your pension benefits.

In its pre-Budget guise, for most people the LTA was £1,073,100, a figure that was due to be frozen until April 2026. That may sound more than enough, but a 65-year-old non-smoker using that sum for an inflation-proofed annuity would only generate an income of about £45,000 a year (before tax).

In his speech, Mr Hunt made clear that one of the main aims of the abolition was to discourage doctors from retiring early to avoid a pension tax charge. However, the beneficiaries of the change will stretch far beyond the medical profession. The LTA was £1.8 million in 2011/12, but since then has been frequently cut or frozen. Consequently, an increasing number of higher earners have reduced or stopped pension contributions for fear that they too would face a tax charge (at up to 55%) when they drew their benefits.

Additional pension measures

There were three other pension measures in the Budget:

  • The annual allowance, which sets a limit on the tax-efficient total contributions in a tax year, was increased to £60,000, but remains subject to taper rules for the highest earners.
  • The money purchase annual allowance, which applies if you have drawn pension income flexibly, was also raised, from a constraining £4,000 to a less restrictive £10,000.
  • A new total cash limit of £268,275 will apply on the tax-free pension commencement lump sum, unless they are covered by some form of LTA protection. The strangely specific figure is based on the effective 2022/23 limit – 25% of the then LTA of £1,073,100.

Mr Hunt’s reforms could offer an opportunity to boost your retirement fund, particularly if you are one of those people forced to halt pension contributions some years ago. In those circumstances, you may be able to contribute up to £180,000 in 2023/24. However, before taking any action, advice is essential – not all the pension tax traps have disappeared.

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Pay attention to tax codes

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Most directors and employees will already have been issued a tax code for the 2023/24 tax year, and it is important to check the figures as a very large proportion of codes will be incorrect. If you’ve been subject to an error, this could mean a future corrective tax bill.

Common errors

A tax code will typically take into account allowances, allowable expenses, taxable benefits (those not payrolled) and untaxed income, so there is plenty of scope for error.

  • Allowances: The code can often assume the incorrect level of income when it comes to the amount of available personal allowance.
  • Allowable expenses: Deductions for subscriptions and professional fees will be based on what was claimed previously, yet these will invariably increase annually.
  • Taxable benefits: For most benefits, HMRC will be unaware of any changes from the previous year.
  • Untaxed income: Figures for bank and building society interest can be too high where, for example, an account has been closed.


Emergency codes

A particular problem can be the use of an emergency code. These can be applied if there is a change in circumstances, such as:

  • A new job;
  • Taking on an additional part-time job; or
  • Starting employment after being self-employed.

The emergency code is used because HMRC will often not receive the employee’s income details in time after the change. Although use of the code is temporary, it can cause a cashflow problem for the employee.

Those starting a new job should give the new employer their P45 as soon as possible. Those moving from self-employment should complete the starter checklist.

Checking and correcting codes

The easiest way a person can check and correct a tax code is by logging onto their personal tax account using their Government Gateway user ID and password. HMRC can be notified of any changes that affect the tax code, and employer details can be updated.

The starting point for checking or correcting a 2023/24 tax code can be found here.

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HMRC sets its sights on hidden electronic sales

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It wasn’t that long ago that HMRC was paying particular attention to businesses understating large cash sales. Now, the decline of cash, especially since Covid-19, has led to a proliferation of software used to suppress electronic sales records.

An electronic sales suppression (ESS) tool manipulates electronic sales records to hide individual transactions, whilst producing a credible audit trail. For example, only one out of every four sales might be recorded, resulting in lower reported turnover.

Penalties, taxes and interest

A penalty can be charged for simply being in possession of an ESS tool, regardless of whether it is actually used to suppress sales. Possession doesn’t just mean owning an ESS tool, as it also includes having access to, or even trying to access, an ESS tool.

For possession of an ESS tool, the initial penalty can be up to £1,000. A penalty of up to £75 a day will then be charged if possession or access to the ESS tool continues. The daily penalty is subject to a £50,000 maximum.

  • HMRC takes a much harsher approach if a similar penalty has already been charged.
  • The initial penalty will not be charged if – within 30 days of receiving the penalty notice ­– a taxpayer can satisfy HMRC that they are no longer in possession of the ESS tool.
  • Similarly, the daily penalty ceases once HMRC is satisfied the taxpayer is no longer in possession of the ESS tool.

And of course, any VAT, income tax or corporation tax avoided will be payable, along with the appropriate interest and penalties.

Typically, card payments for missing sales are routed through an offshore bank account, so it will be difficult to argue such sales suppression is not deliberate and concealed.

Clearly any software designed to facilitate the under reporting of sales is essentially a tax evasion tool as well and should always be avoided.

HMRC guidance on ESS can be found here.

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Tackling rising employment costs

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The 9.7% uplift to the National Living Wage from April 2023 should be welcome news for lower-paid workers, but could present problems if their employer simply cannot afford the increased cost of employing them.

The cost of living crisis is impacting many businesses, especially those in the hospitality sector. Some will cope with rising employment costs by reducing their headcount, but others may have no choice but to close up shop. Small businesses owned by self-employed people are likely to be hit particularly hard.

On top of this, the freezing of the employer national insurance contribution (NIC) threshold until April 2028 will also mean an increased NIC cost for many businesses.

Wage increase

The National Living Wage is paid to employees aged 23 and over, with similar percentage increases to the rates payable to younger employees. The percentage increase for 21- to 22-year-olds at 10.9% is even higher.

  • For each full-time worker aged 23 and over, the increase will see employers having to pay nearly £2,000 more a year in gross salary, with pension, holiday pay and NIC costs on top.
  • There will probably be a knock-on effect higher up the pay scale, with other employees looking for an equivalent salary boost.

Some employers might be tempted to try and cut their wage bill by turning to ‘self-employed’ workers. However, employment status is not simply a matter of choice, and incorrect categorisation can have serious implications.

NIC threshold

The employer threshold is to be frozen at its current level of £9,100, although the annual employment allowance of £5,000 will shield smaller employers (with just two or three employees) from the impact of this decision.

Larger employers will see a stealthy increase to their NIC cost as wages increase, but the starting threshold for NIC remains unchanged.

The minimum wage rates from April 2023 can be found here.

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First time buyers: time to act?

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The increased stamp duty relief for first time buyers has not been reversed by the new Chancellor, but it may not survive beyond the tax year.

One of the few tax cuts to survive from Chancellor Kwarteng’s September’s Growth Plan is the uplift to stamp duty land tax (SDLT) relief for first time buyers. This has gone up from £300,000 to £425,000, potentially saving qualifying first-time buyers up to £8,750.

The current SDLT nil-rate threshold for property purchases in England and Northern Ireland is £250,000, but first-time buyers now benefit from an enhanced threshold of £425,000. The additional £175,000 of nil-rate threshold saves SDLT at the rate of 5%.

In Wales the starting threshold for main residential Land Transaction Tax was lifted from £180,000 to £225,00 from 10 October, which should also help first time buyers. Scotland has not yet made any changes to land taxes.

Eligible properties – mind the gap

The maximum eligible property value in England and Northern Ireland has also been increased from £500,000 to £625,000.

  • If a property costs between £425,000 and £625,000, SDLT (at the rate of 5%) is paid only on the excess over £425,000.
  • However, where the cost of a property exceeds £625,000, normal rates of SDLT are paid on the full purchase price
  • This means there will be quite a jump in the amount of SDLT if a first-time buyer just exceeds the £625,000 limit. For example, SDLT on a property purchased for £625,000 is £10,000, but goes up to £18,800 if the purchase price is merely £1,000 higher.

Eligible buyers

To qualify as a first time buyer, the individual must never have owned a freehold or leasehold interest in a residential property in the UK or anywhere else in the world. They must also intend to occupy the property as their main residence.

This can be problematic for joint purchasers, since all purchasers have to meet the qualifying conditions. First time buyer relief therefore does not generally apply if a parent helps their son or daughter get a foot on the property ladder by taking out a joint mortgage with them, if this also means joint ownership.

It would be no surprise if these SDLT relief increases are partly or fully reversed in April 2023. First time buyers planning to purchase a home in the near future might be advised to do so sooner rather than later to take advantage of this relief before it disappears – the relevant date is the point of completion.

To work out how much you could pay or save, see the Government’s online SDLT calculator, which will work for most types of property purchase.

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17 October 2022: ‘The Growth Plan’ – a further update

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At 6.00 am on Monday 17 October, the Treasury issued a press release announcing that the (new) Chancellor, Jeremy Hunt, would making a statement “bringing forward measures from the Medium-Term Fiscal Plan”. The timing of the press release suggested that the Treasury was concerned it had not done enough the previous Friday to calm markets ahead of the end of Bank of England gilt purchase support.

 

The Chancellor’s statement was in two parts: firstly, a pre-emptive media statement in the morning, then an official statement to the House of Commons in the afternoon. He announced what amounts to a near total unwinding of Kwasi Kwarteng’s ‘fiscal event’ of 23 September.

 

Measures revoked

 

  • The cut to 19% in the basic rate of tax (outside Scotland) from 2023/24 will not take place. Instead, basic rate will remain at 20% “indefinitely”, meaning that even Rishi Sunak’s 2024/25 scheduled timing has been dropped.

 

  • The off payroll working rules in the public and private sectors (often referred to as IR35) will remain in place, reversing their removal at the start of the next tax year.

 

  • The 1.25 percentage points reduction in dividend tax rates, due from 2023/24, will be scrapped.

 

  • VAT-free shopping for overseas visitors will not be re-introduced.

 

  • There will now be no freeze on alcohol duty for one year from February 2023.

 

Under review

 

  • The Energy Price Guarantee (EPG), which was due to cap average domestic bills at £2,500 a year for two years from the start of October, will be scaled back to last only until April 2023. In the meantime, the Treasury will design “a new approach that will cost the taxpayer significantly less than planned whilst ensuring enough support for those in need”. Any support for businesses from April 2023 “will be targeted to those most affected”.

 

Measures retained

 

  • The reduction in national insurance contributions, which reached its third reading in the House of Lords on 17 October, will go ahead.

 

  • The stamp duty land tax cuts that took effect on 23 September will not be reversed.

 

  • The extension of the £1 million annual investment allowance beyond March 2023 remains, as do enhancements to the seed enterprise investment scheme (SEIS) and company share option plans.

 

Financing

 

The measures unwound today account for about £11 billion of the extra £45 bn of borrowing by 2026/27 created by the 23 September ‘fiscal event’. The U-turn on abolishing the top 45% rate of tax (outside Scotland) and Friday’s decision to keep the already legislated for corporation tax increases were worth about £21 bn, implying that over 70% of Kwasi Kwarteng’s planned borrowing spree has now disappeared.

 

Based on recent analysis by the Institute for Fiscal Studies, the 2026/27 financing black hole that remains after all the unwinding is about £32 bn, although press rumours at the weekend suggested that the Office for Budget Responsibility (OBR) could add another

£10 bn to the IFS’s debt projection.

 

The Chancellor stated that there will be “more difficult decisions” to come on both tax and spending. Government departments will be asked to find efficiencies within their budgets. In his initial statement Mr Hunt also said, “Some areas of spending will need to be cut.”

 

Further changes to fiscal policy to put the public finances on a sustainable footing will be announced on 31 October alongside the publication of the OBR’s Economic and Fiscal Outlook.

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UK Prime Minister’s Statement – 14 October 2022

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On 14 October, as an important deadline loomed for Bank of England support of the government bond markets to expire, the government’s political turmoil ratcheted up as the fallout from the ‘fiscal event’ of 23 September claimed its first scalp.

A new Chancellor

Jeremy Hunt replaced Kwasi Kwarteng as Chancellor, making him the fourth Chancellor in as many months.

Chris Philp, the Chief Secretary to the Treasury, was also sacked. He was replaced by Ed Argar, formerly the Paymaster General and Minister to the Cabinet Office.

Corporation tax

At a press conference (the House of Commons was not sitting), the Prime Minister announced that the planned reversal of the increase to corporation tax would not go ahead. The rise from April 2023 to a main rate of 25%, with reduced rates for companies with profits below £250,000, was legislated for in the Finance Act 2021.

31 October remains the date when the Medium-Term Fiscal Plan will be announced. The Prime Minister said that the £18bn tax savings from the corporation tax reversal was a ‘down payment’ on this strategy. That still leaves a shortfall of about £24bn in 2026/27 stemming from September’s announcement.

Spending, said Liz Truss, would grow ‘less rapidly than previously planned’.

Timetable of reversals

Today’s announcements were the culmination of a series of statements and retractions over the last few weeks:

·      On 26 September the previous Chancellor, Kwasi Kwarteng issued an ‘Update on Growth Plan Implementation’ revealing that his Medium-Term Fiscal Plan would be presented on 23 November, alongside a forecast from the Office for Budget Responsibility (OBR).

·      The planned abolition of the 45% tax rate announced in September’s ‘mini-Budget’ survived just ten days before being reversed on 3 October.

·      Seven days later, on 10 October, the Treasury announced that the Chancellor would bring forward the announcement of his Medium-Term Fiscal Plan from 23 November to 31 October.

This last date for the calendar is one of the surviving elements of Kwasi Kwarteng’s planning which Jeremy Hunt will now take forward.

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Chancellor’s May economy statement: all about energy

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In late May, the Chancellor announced new measures to counter the rising cost of living, in particular energy prices.

Initial measures for 2022

In early February 2022, the Chancellor announced a package of measures to reduce the impact of the £693 April 2022 increase in Ofgem’s energy price cap. These were primarily:

  • A £150 council tax rebate for those with properties in bands A–D in England, with corresponding funding for Scotland, Wales and Northern Ireland under the Barnett formula;
  • An Energy Bills Support Scheme to provide a £200 reduction in utility bills for the year starting in October 2022. This was effectively a loan, to be repaid by £40 a year added to bills from April 2023. The scheme applied throughout the UK apart from Northern Ireland, which again received Barnett formula cash; and
  • Extra discretionary funding of £500 million under the Household Support Fund for English councils to allow them to provide support for vulnerable people and individuals on low incomes, again with Barnett money for the UK’s other constituents.

The package, which has had problems with the distribution of the council tax rebates, had a value of about £9 billion. However, with the suggestion from Ofgem that the October price cap will be around £2,800 and inflation already running at 9%, February’s measures looked increasingly inadequate under widespread criticism.

Source: Ofgem

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CGT reporting and payment deadline extended

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I’ve taken a few calls recently, from a number of clients, on CGT on disposal of UK residential property, and although information on this is already in the public domain, here’s a brief summary in case anyone else (non-tax professionals that is) needs clarification on the new regime.

For disposals of UK residential property completed on or after 27 October 2021, the reporting and capital gains tax (CGT) payment deadline has been extended from 30 days after completion to 60 days. The previous 30-day time limit has proved to be quite challenging for taxpayers.

For UK residents, the government has clarified that where a gain is made on the disposal of a mixed-use property, the 60-day time limit only applies to the residential element.

Non-residents

The new deadline also applies to non-UK residents who have to report and pay CGT on the disposal of any type of UK property, whether it is residential or commercial.

Non-UK residents have faced particular problems because a Government Gateway login is required in order to set up a CGT on UK property account. Activation codes are sent by post, so they are often received outside the 30-day time limit. The alternative means having to complete a paper reporting form. The extra 30 days to report and pay should help but setting up a Government Gateway could still be problematic for those living overseas.

Ongoing issues

One of the biggest ongoing issues is that taxpayers are simply not aware of the reporting and CGT payment requirement when they make a property disposal.

  • It seems that solicitors and estate agents are not mentioning the requirements.
  • Accountants are often not informed until the tax return submission comes round. This could be up to 22 months after the completion date.

There is also a problem for self-assessment taxpayers who find they have overpaid CGT via their property account. In theory, the refund should be included within the self-assessment calculation, but this is not happening. It might be possible to obtain a CGT refund by amending the original property return, but otherwise it means having to phone HMRC.

If you believe you are affected, please get in touch with us as soon as possible so we can help you process your requirements. The start point for reporting and paying CGT on UK property can be found here.

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The Autumn Budget – taxed and spent

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After already increasing taxes by £42 billion a year in 2021, the main focus of Chancellor Rishi Sunak’s Autumn Budget was on spending.

The first Autumn Budget in three years – and Mr Sunak’s third in less than 20 months – featured no significant increases in tax. The task of raising extra revenue had already been dealt with earlier in the year, with a range of measures, including allowance freezes and increased corporation tax.

The Budget’s main highlights on the personal front were:

  • There were no changes to inheritance tax and only one technical administrative change to capital gains tax. Both capital taxes had been the subject of extensive reports from the Office for Tax Simplification, so the Chancellor may have abandoned ideas of reform for the short term.
  • A change to pension tax relief was announced, but not the one some had feared. It involved a potential increase in relief for low earners from 2024/25.
  • The increases to National Insurance Contributions and dividend tax, announced alongside the NHS/Social Care package in September, were confirmed and will start to take effect from April 2022.
  • The income tax personal allowance and higher rate threshold (outside Scotland) were left frozen, despite higher inflation effectively making the freeze a greater tax increase.
  • The main ISA contribution limit was frozen at the £20,000 level originally set in April 2017.
  • The increase to the new and old state pension will be in line with inflation to September 2021 (3.1%) rather than the Triple Lock, saving the Treasury (and costing current and future pensioners) over £5 billion a year.

Although the Chancellor said in his speech, “My goal is to reduce taxes”, this will not happen next year. It is not too early to start thinking how you might start cutting tax through year-end tax planning.

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