Hunt brings relief to pension tax traps in 'tinkering Budget' - Evelyn Partners' Head of Tax

Chancellor Jeremy Hunt has just delivered his first full Budget to Parliament.

Sian Steele, Head of Tax at wealth manager and professional services firm Evelyn Partners, says that with little or no action on personal taxation, it is the changes to pension tax allowances that hold most importance for earners, savers and investors:

“The headlines on the taxation of personal wealth and income had all been made at the Autumn Statement, and the Spring Budget this year has been relegated to some tinkering around the edges. Indeed, the Chancellor had effectively shackled himself from doing anything adventurous with a rigidly prudent fiscal stance set out last November, so that even some wiggle room in the public finances couldn’t summon a rabbit from the hat.

“One pleasant surprise in this Budget is the substantial and welcome extension to childcare support, but at £4billion it doesn’t rank among the great Budget giveaways.

“The abolition of the pensions Lifetime Allowance was something of a shock, given that leaks had suggested it was being raised to £1.8million. Alongside the increases to the annual allowances that had been flagged, these are the biggest changes to the personal tax landscape announced today, creating greater scope and flexibility for tax-efficient pension savings. The raising of the Money Purchase Annual Allowance to £10,000 from £4,000 relieves a slightly obscure ‘tax trap’ that can catch out even financially astute retirees returning to work – as it now means that those who have already accessed their pensions flexibly can save more in future years to rebuild their pots.

“The threshold for the tapered annual allowance was raised from £240,000 to £260,000, with the tapered annual allowance itself simultaneously raised from £4,000 to £10,000 and while these changes are welcome, this taper is something of a complex distortion that penalises the highest earners – some of whom might have purposefully left the bulk of their retirement saving until late in their career when their earnings peak. Moreover, a sting in the tail for those who build pension pots above the current LTA is that the 25% tax-free lump sum has been capped at a level equal to 25% of the current LTA of £1,073,000 – a sum of £268,275 that will remain frozen, it seems indefinitely.

“The expected lack of announcements around personal taxation should not deflect attention away from the big changes announced at the Autumn Statement that will take effect on 6 April and again – U-turns allowing - in the 2024/25 tax year. Frozen and falling income tax thresholds and reduced capital gains and dividend tax allowances have widespread implications for how households structure their finances.

“These changes underscore the importance of using ISA and pension allowances and should prompt almost everyone to take a look at their tax situation, which in many cases can benefit from the expert analysis of a tax adviser.”