By Samantha Downes
The Chancellor is understood to be looking at increasing the pension lifetime allowance (LTA) in a move that is being interpreted as attempting to reverse the trend of early retirements.
The PA news agency understands Jeremy Hunt is considering allowing workers to put more money into their pension pot before being taxed as part of his Budget package.
Mr Hunt is keen to bolster Britain’s workforce as he looks to deliver on the Prime Minister’s pledge of growing the UK’s stalling economy.
The lifetime allowance currently stands at £1.07m, with savers incurring tax after that personal pensions pot threshold has been exceeded.
Reports differ about how much Mr Hunt could put the LTA up by in his fiscal statement on Wednesday.
The Times said the Chancellor would hike it to £1.8 million, while The Daily Telegraph said it could be set to more than £1.5m.
It is also understood that the Budget could see the annual allowance rate for pensions increased, with Mr Hunt having tasked his advisers with calculating how much a change would cost the exchequer.
The Telegraph and The Times said the amount each person can save each year before incurring tax was likely to rise from £40,000 to £60,000.
In his Bloomberg speech earlier this year, Mr Hunt vowed to consider fiscal measures that would help the over-50s who had taken early retirement during or after Covid-19 to return to work.
Speaking in January, he said employment levels were lower than they were before the coronavirus pandemic by around 300,000 people.
Mr Hunt said: “So, to those who retired early after the pandemic, or haven’t found the right role after furlough, I say: Britain needs you. “And we will look at the conditions necessary to make work worth your while.”
The pension lifetime allowance was first applied in 2006, when it was set at £1.5m; it rose to a peak of £1.8m by 2012 before gradually being cut.
It was due to stay at £1.07m until 2026 but Mr Hunt could choose to bring a change forward.
The British Medical Association (BMA) has called the current LTA rate “punitive” and argued it has encouraged doctors to leave the profession.
On its website, the BMA said: “High contribution rates, significant pay erosion, and a punitive pension taxation system have resulted not only in an exceedingly high cost of scheme membership for senior doctors, but also in them receiving reduced pension benefits.
“This has resulted in large numbers of doctors retiring early or reducing their hours.”
In January, former pensions minister Baroness Altmann lobbied ministers to change “illogical” pension rules to help ease a workforce crisis in the NHS.
During a House of Lords debate, the Conservative peer said “even middle earners” were finding that their “supposedly tax-free pension contributions” were “causing them to receive huge tax demands that can even exceed the extra earnings”.
She said it meant that some doctors were “effectively paying to work for the NHS” and that the current system was “incentivising people not to work”.
The Treasury said it does not comment on Budget speculation.
Patrick Daly, Press Association
Budget: What will happen to my savings and my pension
Lucinda O’Brien, financial expert at Money.co.uk explained that from 6 April 2023, the policies of last year’s Autumn Finance Bill, also delivered by Hunt, will come into effect.
“Depending on your situation, these may have a significant impact on your finances.”
One of the biggest changes is the cut in the 45% tax threshold. Currently, only those who earn £150,000 pay tax at this rate. As of April, anyone earning over £125,140 annually will be subject to the 45% tax band.
For those earning below £125,140, the personal allowance and the threshold for the basic rate of income tax will remain frozen for a further 2 years, until 2028. Additionally, the thresholds for National Insurance contributions, inheritance tax, and pension tax allowances, will be frozen for an additional 2 years through to 2028.
The state pension is set to rise, meaning that those qualifying for a full (new) State Pension will receive £203.85 a week, up from £185.15.
The benefit cap (the limit on the total amount of benefit you can claim) will increase from £20,000 to £22,020 for families (from £23,000 to £25,323 in Greater London) and from £13,400 to £14,753 for single adults (£15,410 to £16,967 in Greater London).
Annual capital gains tax allowance is set to fall, from £12,300 annually to £6,000 annually in April. The dividend allowance will also fall from £2,000 annually to £1,000 annually.
From the 1st of April, the national living wage will increase from £9.50 to £10.42 an hour. For those under 23 years of age, minimum wage rates will also increase as follows:
- 21-22 year olds: by 10.9 per cent to £10.18 an hour;
- 18-20 year olds: by 9.7 per cent to £7.49 an hour;
- 16-17 year olds: by 9.7 per cent to £5.28 an hour;
- Apprentices: by 9.7 per cent to £5.28 an hour
What does this mean for me?
- Those earning more than £125,140 will pay 45 per cent tax on anything they earn over £125,140 from April. Those earning less than £125,140 should see no change in the amount of tax they pay. This rate of tax is currently frozen until 2026, but as of April will it will be frozen for a further 2 years. This means those earning below £125,140 will continue to pay the current rates until 2028.
- Those newly qualified for their state pension will receive an additional £18.70 a week.
- Families on benefits will see their income increase by £2,020 per year and single adults on benefits will see their income increase by £1,353 per year.
- Home sellers and property investors will be hit by the cut in capital gains tax allowance. If you are planning on selling your house this year you will now have to pay tax on any profit over £6,000 (down from £12,300).
- If you regularly earn more than £1,000 per year in dividends, you will start paying tax on anything you earn over this amount. With the cut in capital gains tax allowance, you’ll also pay more tax on any stocks that you sell. You will be required to pay tax on any profit over £6,000 annually.
- Anyone working on the minimum or living wages will see their income increase by 9.7 per cent (10.9 per cent for 21-22 year olds).
O’Brien, said“=Jeremy Hunt is not expected to announce any tax cuts in his Spring Budget in March, but many of Hunt’s new policies announced in last year’s Autumn Budget will come into effect this April, after the release of the Spring Budget.
“Those earning more than the minimum and living wage, and earning below £125,140, should not see any changes in how much tax they pay.
“Only those earning over £125,140 will be required to pay more tax from April 6th. Those receiving their state pensions, government benefits, or working on the UK’s minimum or living wages, will see their income increase from 6 April.
“The cut in capital gains tax should be factored into the plans of any property investors or anyone selling their house. You will now be required to pay tax on any profit over £6,000 you make from selling property from April this year. Should you sell your house before April, however, you will only pay tax on any profit over £12,300.
“With rising inflation, the Bank of England is increasing its base rate to encourage saving. The base rate is currently 4 per cent, but this is expected to rise further to 5.2% by the end of 2023. This is good news for savers, especially those who will see an increase in their income come April.
“Moving your money to savings accounts with higher interest rates means you can earn more from your money. For example, £1,000 saved in a savings account with 4 per cent will earn you £40 over a year.”
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