Allowances and thresholds: What to look out for in Spring Budget

Chancellor Jeremy Hunt will deliver the UK’s fourth fiscal statement in 12 months on Wednesday (March 15).

The Institute for Fiscal Studies has calculated that the chancellor might have an additional £30bn in headroom due to a fall in energy prices, lower interest rate expectations leading to smaller borrowing costs and tax revenues coming in above estimates.

However, sweeping tax cuts remain unlikely, said Laith Khalaf, head of investment analysis at AJ Bell.

DWP needs to learn lessons from the pastAndrew Tully, Canada Life

“All eyes will be focused on any small gratification that may emerge from Hunt’s red box,” he said.

It wouldn’t be a Budget if there weren’t some speculation around the future of the pension tax system, said Dean Butler, managing director, Standard Life.

So what changes could be in the chancellor’s sights to help the UK public?

MPAA

The money purchase annual allowance (MPAA) has been said to penalise people who either return to the workforce or attempt to replenish savings having used the pension freedoms as designed.

The MPAA reduces the annual allowance for those who have flexibly accessed taxable income from their retirement pot by £36,000, to £4,000.

A joint industry letter signed by AJ Bell and organised by the Lang Cat was sent to the Treasury last week warning that this penalty is a “clear disincentive” for people who want to return to work and keep saving for retirement. 

“It also risks hindering those who have accessed their pension during a period of financial distress from rebuilding their pot afterwards,” Tom Selby, head of retirement policy at AJ Bell, said.

The letter suggested a change in the MPAA to £10,000.

However Butler said an increase in the limit may help but its benefit will be limited to those on relatively large incomes.

“Bigger questions have been raised as to whether it’s really health issues, or some people’s relatively good financial position that are keeping older people out of the workforce," he said.

Lifetime allowance

Another area that may be discouraging some people from continuing to work is the pensions lifetime allowance.

This has also been touted as a probable change in the budget.

The annual and lifetime pension allowances, which stand at £40,000 and £1.073mn respectively, are caps on how much someone can contribute into their pension while still benefiting from tax relief each year.

Further down the line we’d like to see minimum contributions increase to 12 per centDean Butler, Standard Life

The lifetime allowance is seen as a reason for some NHS workers leaving the industry. 

Research by Wesleyan last year showed that a fifth of NHS doctors, nurses and senior staff had or planned to leave the NHS pension scheme permanently in a bid to avoid tax charges, while a further fifth (19 per cent) had or planned to strategically leave and re-join the scheme in an attempt to limit their pension growth.

Butler said: “In the long-run this is an allowance that really isn’t fit for purpose as an increasing number of people will reach the limit and change is needed to ensure that those who do the right thing and save for their retirement aren’t unduly penalised.”

The change might result in the opposite outcome to what the government may be hoping for, said Jon Greer, head of retirement policy at Quilter.

"If these moves are designed to get people to go back to work or continuing to work longer, they may have the opposite impact.

"In fact, it would arguably allow some to retire earlier if they can put more in."

Jason Hollands, managing director at wealth manager Evelyn Partners, pointed out that in the case of the LTA, investment growth is included so someone who has made wise investment decisions can be penalised with a tax charge.

“This has created a disincentive for continued pension saving amongst higher earning professionals and is a factor driving early-retirement decisions at a time when the economy faces the challenge of tightening labour market," he said.

"In particularly, restrictions on pension allowances – which have been reduced over the years both in nominal and real terms – have created well-documented problems in the public sector, especially in the NHS, where generous defined benefit pensions remain in place, meaning that many professionals retire early or are reluctant to take on further work.

"But without a rethink, the LTA is becoming a greater issue for those with defined contribution pension schemes who have saved diligently over a long period, and this will only escalate at current rates of inflation. "

State pension age

The state pension age is legislated to increase over the next 25 years and there is currently a review of the state pension age being carried out looking at whether the existing timetable remains appropriate. 

The review, which was announced in December 2021, looks at whether the rules around pensionable age are appropriate, based on the latest life expectancy data and other evidence.

Life expectancy in the UK has been falling, which has led to some to call for a rethink in planned state pension age increases.

Many people will face a challenge to bridge the gap between when they want to retire and when the state pension startsAndrew Tully, Canada Life

The Department for Work and Pensions will also consider whether it should bring forward the rise in the age at which people become eligible for the state pension to 2037-39. 

Andrew Tully, technical director, Canada Life said these changes need to be communicated effectively.

“DWP needs to learn lessons from the past and ensure anyone within this bracket are told they will have to wait an extra year to claim their state pension,” he warned.

Potentially hundreds of thousands of retirement plans will need to be rejigged, he said, adding that for many, the state pension will not provide a desirable standard of living in retirement, so other savings will be required.

“Many people will face a challenge to bridge the gap between when they want to retire and when the state pension starts.”

Auto-enrolment

Last week, the pensions minister Laura Trott backed a private members bill which would result in the automatic enrolment regime reaching millions more people.

A private members bill from MP Jonathan Gullis, backed on March 3 by the government, grants two extensions to automatic enrolment – abolishing the lower earnings limit for contributions and reducing the age for being automatically enrolled from 22 to 18 years old.

With an election around 18 months away, the chancellor may want to consider the impact these are having on many votersAndrew Tully, Canada Life

The expansion of automatic enrolment was proposed back in 2017 by a government review, but no action had been taken since then to implement those proposals.

The minimum contributions are currently set at 8 per cent for earnings between £6,240 and £50,270.

These are too low and need to be increased soon, Selby said.

“However, going too far, too fast would risk causing a damaging spike in opt-outs, particularly with millions of Brits battling against sky-high inflation,” he said.

Butler said it seems that any change to the percentage of salary contributed by employees and employers is off the table while inflation remains high.

“Further down the line we’d like to see minimum contributions increase to 12 per cent as contribution levels are the single biggest lever we can pull to reduce under-saving and improve retirement outcomes,” he said. 

“The economic forecasts [to be set out] may help inform the debate about when and how quickly contributions should be increased and everyone will be hoping that predictions of falling inflation this year do come to pass.”

Annual contribution – current system (£30,000 earnings)

Source: AJ Bell

Annual contribution – with lower earnings band removed (£30,000 earnings)

Source: AJ Bell

VCTs

The Treasury Committee today (March 10) called for the chancellor to clarify whether the tax breaks for venture capital trusts (VCTs) and enterprise investment schemes (EIS) will be extended beyond April 2025, when they are due to expire.

In the "mini" Budget last year, former chancellor Kwasi Kwarteng extended the tax reliefs for VCTs and EIS, but the committee has called for clarity on these extensions.

Chair of the Treasury committee, Harriett Baldwin, said the committee had received a "significant volume" of evidence on the importance of the schemes to allow businesses to grow, and for firms to plan the future.

"The chancellor needs to provide clarity and certainty on the future of these pro-growth schemes in next week’s budget.”

Baldwin noted a letter she received from Hunt this week (March 7) that noted the government's support.

"It is the government's firm intention to extend [these schemes] beyond the current sunset," he said.

Commentators have previously said that VCTs and EIS can help the UK's productivity problem.

Tax thresholds 

In the Autumn Statement last year, Hunt extended the freeze on UK income tax allowances and thresholds until 2027/28.

Income tax thresholds were already frozen until 2026 under the previous chancellor, now Prime Minister, Rishi Sunak.

This move, seen as a ‘stealth tax’ will have pulled more people into the income tax system for the first time, or into higher tax bands over the years, as wages increase under record inflationary pressures.

Any further freezing of tax thresholds will leave millions out in the cold, said Tully. 

“With an election around 18 months away, the chancellor may want to consider the impact these are having on many voters in advance of the next general election.”

sally.hickey@ft.com