Inflation forecast to fall by end of 2023
Jeremy Hunt gave a positive update from the Office for Budget Responsibility on the rate of inflation, which is expected to slow, by more than expected, to 2.9% by the end of the year. Fears around the cost of living have been a key factor for people of all ages across the UK, so any forecasts about price rises calming will be warmly welcomed.
Lifetime allowance to be abolished
The lifetime allowance - the maximum amount you can take from your pension pots in your lifetime without incurring extra tax charges - was introduced in 2006. But over the years it’s been reduced, and has been frozen at £1,073,100 since the 2020/21 tax year. In reality the lifetime allowance will be abolished from 6 April 2024, but additional tax charges will no longer apply from 6 April 2023.
It should be noted though that maximum tax-free cash will still be linked to the current lifetime allowance (£1,073,100), and frozen at that level. That means a maximum of £268,275 tax-free cash, or higher if you have fixed protection in place. (We’re awaiting confirmation about individual protection.)
Pensions annual allowances to increase
The annual allowance is the total that you, your employer or a third-party can pay in across all your pension plans in a single tax year and receive tax relief. Contribute any more than this and you could have to repay that tax relief. The main annual allowance will rise from £40,000 to £60,000 from the start of the next tax year. Those on higher earnings are limited to smaller contributions.
There was also confirmation that the money purchase annual allowance will increase from £4,000 to £10,000. This move will be welcomed by people who have started to make withdrawals from their pensions (beyond tax-free cash) but are in a position to make further contributions.
Energy price guarantee extended
In his Autumn Statement, Jeremy Hunt had announced that typical household energy bills would rise from £2,500 to £3,000 from April 2023. However, today he said that the energy price guarantee will stay at £2,500 until the end of June, although as the £400 winter fuel payment has now ended, many people may still see a rise in their energy bills.
Energy fuel duty frozen
Fuel duty was cut by 5p last March, and it will stay at its current level for another year.
Draught drinks duty frozen
From 1 August, the duty on draught drinks in pubs, such as beer and cider, will be up to 11p lower than the duty in supermarkets. Commenting on this, Jeremy Hunt said it was “a differential we will maintain as part of a new Brexit pubs guarantee”.
Corporation tax to rise but tax boosts for smaller businesses
Corporation tax is to increase from 19% to 25% in April. However, the Chancellor has announced some tax incentives for smaller businesses, including increasing the annual investment allowance to £1 million, meaning they can deduct all their investment costs from taxable profits.
There will also be 12 new business investment zones introduced across the Midlands and northern regions of England, plus at least one each in Scotland, Wales and Northern Ireland.
Free childcare expanded
Working parents with three- and four-year-olds are currently eligible for 30 hours’ free childcare a week. This will now be extended in England to cover all children over nine months for 38 weeks, with similar measures expected to also be announced in the other home nations.
Our view on the Spring Budget
On the pension allowance changes:
“The Chancellor’s pensions reforms, including the surprise abolition of the pension lifetime allowance and increases across annual allowances, will be widely welcomed by those approaching or saving for retirement and those who have retired and returned to work. Increasing how much can be saved into a pension with the benefit of tax relief each year and how much can be held in your pension will help many looking to save as much as they can for their retirement. While the complexities of these policies and any wider impacts on financial plans aren’t yet clear, the principles are overtly positive.
“These policies will make staying in work for higher earners and flexi-retirement generally more attractive. This follows calls from across the retirement industry to bring the way we save into our pensions in line with how many approach retirement today. This will help those who want to stay in work for longer and continue to save into their pensions without creating tax issues, whilst also helping those who return to work after a period of retirement to top up their savings for the future.”
On the cost of childcare:
“The Chancellor placed a big emphasis on one of the most pressing issues facing families, the cost of childcare. The steep climb in the cost of nursery and child minding has led families to make tough choices, including whether or not to return to work.
“Measures announced today are welcomed, and we hope this helps ease the pressure on parents who want to work and save for the future. Without that support, many parents could have been forced to sacrifice their ability to work, their spending and their saving to fund or avoid childcare costs.”
On general support for personal finances and savings:
“‘Get the economy growing again’ was the phrase of the day in the Chancellor’s Spring Budget, but beyond the headline-grabbing pensions changes, there were no specific measures to support the growth of people’s savings and no wider changes to personal taxation to put more in people’s pockets. Supporting wider savings, as well as pensions, will be key to ensuring people can improve their personal finances for the longer term, particularly as people start to feel the effects of frozen income tax thresholds and the reduction in the annual exempt amount for capital gains tax previously announced.
“Without making changes to their financial plans, and against the backdrop of the cost-of-living crisis, those with savings are likely to see their pots continuing to be hit, and those without savings will struggle to start to build any up.
“On a more positive note, continuing high interest rates present some opportunities for those who can save and invest. Improving rates on some savings accounts and products could complement income tax and capital gains tax benefits that certain products such as ISAs can deliver, particularly given the changes to those taxes that the Chancellor has already announced. Where these solutions are right for you, they can make a valuable difference as you build up as much as you can for the future.”
Remember that we’re here to help
If you have any questions about what was announced in the Budget and how it may affect you, or you’d like to discuss potential action following the Budget announcements, please get in touch with your abrdn financial planner.
The information in this article should not be regarded as financial advice. Information is based on our understanding in March 2022. Tax rules can always change in the future. Your own circumstances and where you live in the UK could have an impact on tax treatment. The value of investments can go down as well as up, and could be worth less than was paid in.