Pension lifetime allowance abolished
Pension annual allowance increased to £60,000
Pension tapered annual allowance increased to £10,000
Tax simplification for trusts and estates with minimal income
Simplifying tax for low income trusts and estates
The Government will introduce measures to exempt trusts and estates from income tax if their income is £500 or less. The measures will also mean that beneficiaries of such estates are not taxed on distributions of income falling within the £500 limit.
From the 2024/25 tax year, where the net income of a trust or an estate in administration is £500 or less, the trust or estate will be deemed to have no income for tax purposes. This may mean that there is no need for a tax return to be filed.
The £500 limit will be proportionately reduced depending on the number of trusts set up by the same settlor, with a lower limit of £100. Interest in possession trusts, settlor interested trusts, vulnerable beneficiary trusts and heritage maintenance trusts will not be taken into account when calculating the reduced allowance.
This will replace the existing rule which treats up to £1,000 of trust income as being taxable at a lower rate.
If, because of these measures, an estate is deemed to have no taxable income, the actual income of the estate will not be taxed on a beneficiary when it is distributed.
Additional measures will mean that income received by an estate beneficiary is taxed as savings income if it was savings income when it arose in the estate, so that the beneficiary can use their available savings allowances in respect of the income.
These measures will be welcomed, particularly by personal representatives and beneficiaries of lower-valued estates, as they will reduce administration and simplify reporting requirements.
When will it apply?
From 6 April 2024, except for the additional measures for beneficiaries of estates which will apply from 6 April 2023
Consultation on how to modernise and digitalise HMRC’s income tax services
The number of taxpayers interacting with HMRC about their tax affairs continues to grow. With an increasingly limited human resource available to deal with telephone calls and paper post, the Government is exploring how to deliver services more efficiently. It is seeking views on how it can encourage more taxpayers to interact with HMRC through its online digital services and to streamline the process for registering for self-assessment.
A 12-week consultation on modernising income tax services has been launched, which focuses on a number of areas where efficiencies might be gained:
- Increasing the ability to review and make changes to PAYE coding notices in real time
- Offering a new service to allow a taxpayer to access and store their national insurance number digitally
- Encouraging more taxpayers to opt for tax repayments to be made electronically rather than by payable order
- Gradually limiting access to telephone and postal services where queries can be dealt with digitally
- A ‘digital by default’ approach, including sending a number of standard documents through a taxpayer’s digital tax account, including repayment reminders and notifications
Measures are also being considered to streamline the process of registering for self-assessment, including increasing the use of online registration, the introduction of a clearer set of criteria for those who need to file tax returns, and making it easier to contact HMRC to collect tax through the PAYE tax code.
The Government will also bring forward a further set of tax administration and maintenance announcements later in the spring at a Tax Administration and Maintenance Day.
The consultation includes a number of sensible proposals that should allow many taxpayers to ‘self-serve’ without the need to interact directly with an individual at HMRC. These will be welcome changes to the extent that they free up resources to improve service levels in more complex areas.
Provision will be made to ensure that adequate support is given for digitally excluded taxpayers and those needing additional help. It is disappointing, however, that the document was largely silent as to whether or not HMRC will grant tax agents access to their client’s digital accounts, which would unlock even greater efficiencies.
When will it apply?
The consultation closes on 7 June 2023
New elective accruals basis for taxation of carried interest
The Government will legislate to allow investment managers who receive carried interest to elect to be taxed on an accruals rather than receipts basis. This will assist with claims for credit for non-UK tax paid on the carried interest.
Individuals working in private equity are typically rewarded in part through ‘carried interest’, which is a capital entitlement due to them as a result of successful investments by the funds for which they provide investment management services.
In the UK, carried interest is chargeable to capital gains tax, albeit at the higher rates of 18% or 28%.
Carried interest is taxed in the UK when it arises to the individual, but often, where funds operate in multiple jurisdictions, individuals can be subject to tax in more than one country on their carried interest receipts. These different jurisdictions may apply tax on a different basis and at different times, which can create difficulties when claiming relief against the UK tax, even where a double tax treaty applies.
The Spring Finance Bill 2023 will contain provisions allowing individuals entitled to carried interest to elect to be taxed at an earlier point on their entitlement. This will allow them to align the UK and non-UK tax points, thereby ensuring they are eligible for double tax relief.
Carried interest often forms a large and important part of the reward package for those working for private equity funds, but the tax treatment of it can be complicated, with the complication compounded where there are inter-jurisdictional elements to consider.
This proposal directly addresses an issue that can often arise for those entitled to carried interest, so will be welcomed by those affected.
US citizens who are resident in the UK may benefit from these proposals, as the timing of carried interest is often earlier under US principles compared to UK. This may make it easier to claim double tax relief and avoid double taxation.
The Government will also hope that this helps the UK to remain an attractive jurisdiction from which to operate private equity funds.
When will it apply?
For tax years 2022/23 onwards.
New measures to target tax evasion and more funding for HMRC debt management
The maximum sentence for tax evasion will double to 14 years. Subject to consultation, tax avoidance scheme promoters may face jail time, and directors of companies involved in promoting tax avoidance may be disqualified. HMRC will also be given more money to manage unpaid tax debt.
Maximum sentences for the most serious tax evasion cases are to be doubled to 14 years. The Government will also consult on a new criminal offence where tax avoidance promoters fail to stop their activities when ordered to do so. Directors of companies who promote tax avoidance schemes may also face accelerated disqualification proceedings.
HMRC will also be given £47 million to manage the collection of unpaid tax debts better and to help distinguish between those who cannot pay and those who choose not to. The online self-service time to pay service will also be enhanced.
The Government is clearly committed to clamping down further on those who commit the most serious tax frauds and on tax avoidance promoters who choose to ignore the rules. The potential criminal offence for tax scheme promoters builds upon a raft of civil measures that have been introduced in recent years.
The further investment in HMRC debt management is welcome, as many individuals and businesses continue to struggle with paying tax bills in the post pandemic era. The ability to apply for time to pay arrangements online is particularly helpful and should reduce the burden on HMRC’s stretched telephone services.
When will it apply?
Freezes to allowances and limits
The ISA annual subscription limit will remain at £20,000 for the 2023/24 tax year. The limits for child trust fund and junior ISA subscriptions also remain unchanged at £9,000 per tax year.
The amount that an individual can contribute to their ISA in the 2023/24 tax year will remain unchanged for the seventh consecutive tax year. It is a similar story for junior ISA limits, which have been frozen since 6 April 2020.
Confirmation of the main rates and allowances will be included in the Spring Finance Bill 2023, which will be published on 23 March. It was previously announced that the personal allowance and higher rate threshold will remain at the current levels, £12,570 and £50,270 respectively, until 5 April 2028.
At a time where inflation is impacting on the cost of living, freezes in rates and allowances bring a ‘stealth tax’ that impacts the lowest earners.
At the same time, those wanting to invest for the future over a sustained period in a tax-efficient environment see their capacity to do so restricted for another year.
When will it apply?
From 6 April 2023
Reforming pension tax thresholds
The pension lifetime allowance charge will be removed, before it is fully abolished in a future Finance Bill. Alongside this major change, increases in the annual allowance, the money purchase allowance, the minimum tapered allowance, and the minimum tapered allowance income threshold were also announced.
The lifetime allowance is the maximum amount that can be held in a pension before it is subject to an additional tax charge. Currently, the allowance is £1,073,100. From 6 April 2023, the lifetime allowance charge will stop being levied and from April 2024 the lifetime allowance itself will no longer exist. This means that an individual is no longer restricted on the total amount that can be held in the pension fund.
Despite the lifetime allowance being removed, there will still be a restriction on the total amount of tax-free cash that can be taken from a pension. This will be limited to 25% of the current lifetime allowance, which equates to £268,275. That said, anyone with any form of lifetime allowance protection will still be entitled to a higher level of tax-free cash. It is not yet clear whether or not making future pension contributions will result in this protection being lost.
The annual allowance for pension contributions will also increase from the current level of £40,000 to £60,000, and the ability to carry forward unused allowances for three tax years will remain in place.
Annual allowance tapering will also remain but the threshold after which the annual allowance will be reduced will increase from £240,000 to £260,000. The minimum annual allowance after tapering will increase from £4,000 to £10,000.
Finally, the money purchase annual allowance will increase from £4,000 to £10,000. The money purchase annual allowance may apply if an individual has already started to draw an income from their pension.
Following many years of restrictions being applied to pension savings, this is certainly welcome news. Relaxation of allowances was expected, with specific reference made to NHS doctors, where reports suggested 80% were being caught by the lifetime allowance charge when retiring.
The announcement however takes this further than anticipated with the abolition of the lifetime allowance.
As the Chancellor pointed out, this will not only benefit NHS doctors but also many other pension savers who were reluctant to continue saving into their pension for fear of breaching the lifetime allowance.
As pension funds usually fall outside the scope of IHT, this abolition has the added advantage for taxpayers of providing additional shelter from IHT.
While the lifetime allowance means there is no restriction on the size of a pension pot when taking benefits, tax-free cash will still be limited to 25% of the 2022/23 lifetime allowance.
Additionally, the annual allowance restriction and tapering rules still remain in place, which will limit a high earner’s ability to save into their pension.
Overall, however, a positive set of announcements for those looking to save for the future via a pension.
When will it apply?
From 6 April 2023.
Consultation on the reform of the cash basis for small businesses
The proposals outlined for consultation would see more businesses brought within the scope of the cash basis for calculating trading profits.
The traditional method for calculating trading profits requires businesses to recognise income and expenditure on the basis of when they are ‘earned’ and ‘incurred’. The cash basis provides a simpler alternative allowing small businesses to report and pay their tax based upon the income received less expenses actually paid within the given accounting period.
The consultation will review the impact of increasing the current turnover threshold of £150,000, to bring more businesses within the scope of the simplified measure. The proposal will also consider relaxation of the associated loss relief restrictions and the limit imposed on relief for interest incurred.
Small businesses will welcome measures that simplify reporting requirements. Allowing traders to offset losses against their other income will remove the penalty currently imposed on loss-making businesses for opting to simplify their affairs.
Some traders may benefit from retaining the standard method of calculating profits, depending on their specific circumstances.
When will it apply?
Other income tax measures
The following is a summary of some previously announced personal tax measures that have been included in the documentation for this Budget, and one new measure.
The Government has announced a new measure that will prevent non-UK charities from benefitting from charitable reliefs and exemptions. These can now only be claimed by UK charities and amateur sports clubs, whereas previously those in the EU and European Economic Area could also benefit. This change to the definition of a charity will have impacts for nine taxes and duties, including income tax. There will be a transitional period until April 2024 for those non-UK charities and amateur sports clubs that HMRC has previously accepted qualify for charity tax reliefs.
Previously announced measures include:
- Individuals with income below the personal tax allowance who save into a pension using a net pay arrangement will have their contributions topped up by the Government. This will apply to contributions made from the 2024/25 tax year, though the top-up will be paid in the following tax year. This is to address a discrepancy that left them with a worse outcome than those saving using relief at source
- The Government has confirmed its decision to abolish the Office of Tax Simplification. This will be effective from the date of Royal Assent of Spring Finance Bill 2023
- Taxpayers will no longer be able to assign the right to receive their income tax repayment to a third party from 15 March 2023. This measure was announced following consultation on raising standards in tax advice, to protect taxpayers claiming tax repayments