What does the UK autumn budget mean for pensions and tax?
By Paul Montague, Partner, Blevins Franks
928 433 411 | canaryisles@blevinsfranks.com | www.blevinsfranks.com
UK Chancellor Jeremy Hunt delivered his Autumn Statement to Parliament on 22 November. For UK residents the good news was the cuts in National Insurance Contributions, though income tax thresholds remain frozen. It was also confirmed that three new pension allowances will be introduced following the abolition of the Lifetime Allowance.
The Autumn Statement is when the government delivers its plans for the UK economy based on the projections from the Office for Budget Responsibility (OBR). So, what were some of the key announcements made in the budget – and how might they affect you?
Reductions for tax and National Insurance contributions
In response to the swifter-than-anticipated economic recovery and a halving of inflation rates, the government outlined a series of tax cuts and fiscal adjustments, signalling a proactive approach to bolstering the financial well-being of citizens. Addressing members of parliament, the Chancellor pointed out that the current high employment taxes that affect 27 million people act as a disincentive to the hard work that should be prioritised.
Effective from 6 January 2024, the main rate of Class 1 employee National Insurance contributions (NICs) will be reduced from 12% to 10%, while the main rate of Class 4 self-employed NICs will decrease from 9% to 8% from 6 April 2024. Furthermore, the government announced the cessation of mandatory Class 2 self-employed NICs starting 6 April 2024.
Tax allowances remain frozen
The National Insurance cuts are welcome, but only partially offset the fiscal drag created by the frozen income tax thresholds. The budget did not include any plans to remove the freeze, currently scheduled until 2028.
Often referred to as ‘tax by stealth’ or ‘hidden tax rises’, freezing thresholds and allowances means that many taxpayers end up paying more tax over time.
The pension triple lock rise
The budget confirmed that the government will honour its commitment to the pensions triple lock, which means that the State Pension will rise by a notable 8.5% from next April.
The ‘triple lock’ principle underscores a commitment to augment the state pension by the highest of three metrics: average earnings growth, Consumer Prices Index (CPI) inflation, or a minimum of 2.5%.
The Chancellor explained that the triple lock has been “a lifeline for many during a time of high inflation. Today we honour our commitment to the triple lock”. The upcoming 8.5% increase is in line with earnings, building upon the preceding 10.1% rise in harmony with CPI inflation.
New pension allowances to replace the Lifetime Allowance
Legislation proposed in the Autumn Finance Bill 2023 eliminates the Lifetime Allowance, offering clarity on the taxation of lump sums, death benefits and the tax treatment for transfers to overseas pensions.
The ‘Lump Sum Allowance’ and the ‘Lump Sum Death Benefit Allowance’ were anticipated. However, official documents published the same day as the Autumn Statement also revealed that an ‘Overseas Transfer Allowance’ will apply from April 2024.
What are these new allowances, and how will they affect the way you access your pension funds?
The Lump Sum Allowance
The Lump Sum Allowance (LSA) applies to payments made during the pension scheme member’s lifetime. Under the new regulations, the LSA will be set at a fixed limit of 25% of £1,073,100, equivalent to £268,275.
This allowance encompasses tax-free cash from Pension Commencement Lump Sums (PCLS) and Uncrystallised Funds Pension Lump Sums.
Notably, it now also includes trivial commutation lump sums, small lump sums, and winding-up lump sums with uncrystallised rights, which were not previously subject to testing against the Lifetime Allowance (LTA) and did not require reporting.
The Lump Sum Death Benefits Allowance
The Lump Sum and Death Benefit Allowance (LSDBA) is applicable to death lump sum payments. Similar to the Lifetime Allowance, the LSDBA will have a fixed limit of £1,073,100.
When the death benefit is paid as a lump sum, it will only be tax-free if it falls below the deceased’s remaining LSDBA. Any excess will be taxable at the beneficiary’s marginal rate of income tax. This applies regardless of the member’s age when they die.
If, however, the pension fund is designated to drawdown within two years of the death, and the benefit is taken as pension income, then the age of death remains relevant. The tax treatment remains similar to the current rules, as follows:
- If the death occurs before age 75, the payment will be tax free.
- If the death occurs after age 75, the recipient will pay income tax.
The Overseas Transfer Allowance
HM Revenue & Customs describes the new Overseas Transfer Allowance (OTA) as a measure to tax transfers of registered pension schemes out of the UK into Qualifying Recognised Overseas Pensions Schemes (QROPS), for any amount that exceeds the individual’s available allowance.
The allowance will be the same as the LSDBA – £1,073,100.
From the information released so far, one could conclude that the Overseas Transfer Allowance metaphorically replaces the Lifetime Allowance for overseas transfers.
While transfers into QROPS were tested against the Lifetime Allowance until April 2023, from 2024 they will be tested against Overseas Transfer Allowance. The allowance is the same amount, but going forward any excess will be subject to the Overseas Transfer Charge of 25%. Although the proposed law is yet to receive royal assent, there is a possibility that this will apply for all transfers to QROPS, including EU ones.
It is possible that this would have a positive impact on those who currently fall outside of the current exclusions, potentially saving them £268,275. Conversely, individuals with larger pension funds who are within the current exclusions would be subject to a 25% overseas transfer charge on any amount that exceeds the limit (£1,073,100).
If you think any of these announcements could affect you, take personalised advice on what impact they may have.
Those with pensions over €1,000,000 in particular may need to seek clarification on how they and their heirs could be affected, it at all. With a start date of 6 April 2024, there is very little time to take action before the new regulations come into effect. These reforms make an already complex regime even more of a minefield, particularly for expatriates, so it is important to take personalised, regulated cross-border advice.
The tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; an individual should take personalised advice.
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