Amendments to the tax rules for pension savings were the main announcements in the area of personal taxes. Highlights from the main Budget publication are changes to charitable tax reliefs, a new consultation on extending the cash basis for unincorporated businesses and the Government has published a discussion document on modernising HMRC’s income tax services.
This discussion document will be open for responses until 7 June 2023 and explores how HMRC can simplify and modernise income tax. It sets out HMRC’s intention to move to a digital by default approach for some of its outputs, seeks views on improving Pay As You Earn processes, and launches a review of the income tax self-assessment criteria.
The annual allowance limit determines the maximum amount of pensions contributions an individual can make in a tax year, when combined with any employer contributions, for the individual to obtain income tax relief. Contributions in excess of an individual’s annual allowance limit are subject to the annual allowance charge.
The Spring Budget announced that the annual allowance limit, currently £40,000, will increase to £60,000 from 6 April 2023. Individuals will continue to be able to carry forward any unused annual allowance from the previous three tax years.
The minimum annual allowance limit of £4,000 will increase to £10,000 from 6 April 2023. The adjusted income limit has not been removed, but will increase from £240,000 to £260,000 from the same date with the annual allowance limit continuing to reduce by £1 for every £2 of income over the increased limit of £260,000. Because of these changes, the minimum limit of £10,000 from April 2023 will now be reached when an individual’s income is £360,000, and not £312,000 as it does currently.
Lifetime allowance limit and lifetime allowance charge
The rules around the lifetime allowance limit, effectively the maximum which can be built up by an individual in pension benefits, are also changing. The lifetime limit is currently set at £1,073,100 with the lifetime allowance charge applying if pension savings are higher than the lifetime allowance.
The lifetime allowance charge is being removed from 6 April 2023 and from 6 April 2024, the lifetime allowance limit will be abolished entirely.
Money purchase annual allowance
Once an individual flexibly accesses their defined contribution pension savings, the total tax-relieved pension savings they can make each year is restricted to the level of the Money Purchase Annual Allowance (“MPAA”). The MPAA will revert to £10,000 from April 2023 (increased from its current level of £4,000).
From 6 April 2023, charitable tax relief will be restricted to UK charities and Community Amateur Sports Clubs only. European Union and European Economic Area charities accepted by HMRC as qualifying for charity tax reliefs before 15 March 2023 will continue to be accepted until 6 April 2024.
The 0 percent starting rate for savings will remain at £5,000 and the annual subscription limits for Junior Individual Savings Accounts (ISAs) and Child Trust Fund accounts will remain at £9,000 with the annual subscription limit for adult ISAs remaining at £20,000.
The amount of income tax relief available to foster carers and shared lives carers via qualifying carers relief was increased. The threshold of income at which qualifying carers begin paying tax on care income will be increased to £18,140 per year plus £375 to £450 per person cared for per week from 6 April 2023. These thresholds will then be index-linked in future.