One of the biggest news stories in the March Budget was the abolition, from April 2023, of the pension Lifetime Allowance (LTA).
In the days before the Budget, the possibility of an increase was speculated on, driven by worries over NHS workers having retired earlier than planned due to the very harsh effective tax rate they incurred by carrying on working and building up more pension benefits. However, very few commentators saw the complete abolition coming.
In the Budget, the Chancellor announced measures relating to pensions tax limits including a scrapping of the Pension Lifetime Allowance (LTA) from 6 April 2023.
The LTA was a cap (set at circa £1.07m per individual for the tax year 2022-23) on the amount of pension savings that could be accumulated tax free, and a tax charge arose on any excess funds when pension was taken. This tax charge was either 55%, if the excess was withdrawn as a lump sum, or 25% if the balance was left in the fund (but the remainder would then be subject to income tax at the recipient’s marginal income tax rate when drawn).
Very broadly the LTA charge would apply at the age of 75 or on another “Benefits Crystallisation Event” (BCE), the definitions of which are outside the scope of this article.
Alongside the LTA announcement, there was also an increase in the pension annual allowance, the maximum amount that can be saved in a pension that qualifies for tax relief each year.
From 6 April 2023, this increased from £40,000 to £60,000, and the increase is coupled with a rise in the adjusted income level from £240,000 to £260,000 over which the allowance begins to taper away (reducing by £1 for every £2 of taxable income above that threshold, up to £360,000 of income where the minimum annual allowance of £10,000 applies).
Although this measure was clearly aimed at NHS doctors, other taxpayers who are now able to accrue pension pots of unlimited value are incidental beneficiaries.
Perhaps the most likely effect of removing the LTA will be the increased use of pensions as Inheritance Tax (‘IHT’) protection vehicles (they are typically “written into trust” and thus outside of an individual’s estate for IHT purposes, though if the person lives past 75 then the pension pot will suffer income tax when drawn by the beneficiaries).
Whether the favoured IHT status of pension funds would survive under a future Labour government must be open to question. Indeed, Labour are already on record as saying they would be reintroducing the LTA if voted into power (though apparently not for NHS doctors, so it doesn’t sound like tax simplification will be high on their agenda!).
That Labour party statement is quite pivotal from a longer term planning perspective. If we rewind time by a decade or so, when the LTA was roughly double its current level (it was £1.8m back in 2011/12), and factor in that £1.8m in 2011 was worth a lot more than in 2023, it’s easier to understand why pensions were much more commonly used as a vehicle to hold commercial property used by family trading businesses.
That practice has become less common since the successive reductions of the level of the LTA over the past decade, and whilst the March 2023 Budget’s abolition of the LTA theoretically re-opens the door to that type of planning, the proximity to the next election and the lead Labour (currently) has in the polling, together with that reactionary statement they have made, makes it quite difficult to seriously consider pushing clients who are buying property to look down that path for the perceived potential tax breaks.
Furthermore, it is worth that the ‘tax-free lump sum’ remains capped at 25% of the current LTA, so just under £270k. So while there can theoretically be more relief gained in the way in, there will still be tax on the way out (albeit perhaps less penally for now).
Finally, it must always be borne in mind that a company making employer pension contributions for directors and looking to claim corporation tax relief will need to be able to justify the total remuneration package (excluding dividends which are purely a shareholder payment) as being “commercial” in order to satisfy the “wholly and exclusively for the benefit of the trade” hurdle. Given that “catch up” pension payments are possible (although, again, outside the scope of this article), it’s crucial to remember that corporation tax relief is not automatically a “home run”.
As ever, various taxes need to be considered holistically and from the company and the owners’ collective standpoints.
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