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Spring budget: new tax benefits for pension savers

Just on the eve of the most anticipated fiscal years, where taxes will be increased for many and some crucial allowances will be scrapped, the spring budget comes with some good news for those looking to find tax-efficient ways to invest, especially in the pension space.

The Chancellor has announced a plan to scrap life-time allowance and to increase the tax-free annual allowance for those investing in a pension. The annual amount that people will be able to contribute in a tax-free pension wrapper like the SIPP will increase from £40,000 to £60,000 from 6 April 2023. Also, starting from 2024, there will no longer be a limit on how much people can invest in a pension over a lifetime.

In addition, the government will increase the money purchase annual allowance (MPAA) to £10,000 from £4,000. This means that people who have already taken income from their pensions would be able to contribute up to £10,000 into this tax-free wrapper. Conveniently this would be separated from your estate for inheritance tax purposes.

Finally, the adjustment of the tapered annual allowance is good news to high earners. Tapered annual allowance gradually squeezes, to a minimum £4000, the tax-free pension allowance for those earning more than £240,000 a year. From 6 April 2023 and the minimum amount they can be tapered to will increase to £10,000.

The declared objective of those measures is to encourage workers, particularly senior medical staff from the NHS, to stay in employment for longer. Albeit not necessarily relevant for all investors at the moment, these measures come as a breath of fresh air, effectively reversing the policy direction on pension allowances (which had been reduced for over a decade by both Labour and Conservative governments).

It is also important to put the measures in context. Starting from next year, the capital gain allowance will be significantly reduced. Currently people could make up to £12,300 in capital gains in a single tax year without paying any capital gains tax. However from the 6th of April, this will be reduced to £6,000 and the year after it will become £3,000. The ease on the limits for tax-free pension investment offers some wiggle room to all that want to plan their retirement in a tax-efficient way (with significant consequences for inheritance planning and financial planning in general). If you wish to understand if any of the measures introduced impact your position or your planning, ahead of the tax-deadline of the 5th of April, our team can support you in that.

Trying to broaden the view, yesterday’s budget offered a more positive narrative about the state of the UK economy. The Office of Budget Responsibility, the independent watchdog in charge of economic forecasts, said that the economic downturn in 2023 will be “shorter and shallower” than previously predicted, as the UK economy should shrink only by 0.2% avoiding a technical recession. Inflation is expected to fall to 2.9% by the end of this year, the OBR has predicted, marking “a more rapid decline than we expected in November”.

These are good news that have the effect of infusing some confidence into households and businesses about the perspective of the economy. Sadly, this may come as little relief to the many that are still struggling with the cost of living crisis (the thousands of civil servants that yesterday took to the streets in central London demanding a pay rise are a good reminder of that). The budget takes some interesting initiatives to help households navigate these difficult times. To name a few: extended free childcare, support for innovative businesses who want to invest and continued support for energy bills will benefit many. On the other hand, planned tax increases (on corporate tax and Capital Gain) have been confirmed, as budget responsibility will remain a priority for the next few years.

In this context, just ahead of the 5th of April deadline, it’s more important than ever to take advantage of the allowances that the government offers to investors. This is done optimizing, when possible, your financial planning, moving savings towards tax-free wrappers such as ISA and SIPP.

It’s worth remembering that most people’s financial future is tied to the performance of the UK economy, including their income, real estate value, and currency. Diversifying your financial risk where you can, investing in the global economy, may be a sensible idea.

If you wish to understand how the last budget is affecting you or you want to review your current approach in light of that, we encourage you to reach out to our team by calling, emailing or booking an appointment.



*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.