UK 2023 Autumn Budget Snapshot

01 December, 2023

On 22 November 2023, Jeremy Hunt delivered his Autumn Statement alongside the UK’s fifth Conservative Prime Minister since 2016, Rishi Sunak. There were some headline grabbing announcements regarding cuts to National Insurance contributions and increases to UK State Pension benefits, however, the Chancellor remained silent on UK income tax bands. From a UK pensions’ perspective, some key announcements that could impact British expatriates included:

Continued Freeze to UK Income Tax Bands

As mentioned above, no changes were announced to UK income tax bands in the Autumn Statement. Current thresholds have been frozen since the 2021/22 UK tax year and they have been slated to remain frozen until 2027/28. With strong wage growth this could result in millions of people paying additional tax by 2027.

UK State Pension to Rise by 8.5%

After press speculation that the Chancellor might not increase the UK State Pension by the full “triple-lock” to smooth out the effect of high public sector bonuses in July, Jeremy Hunt confirmed the government would in fact honor the triple lock. The new full State Pension will increase from £10,600 per year to £11,502.40 per year.

Abolition of the Lifetime Allowance (LTA)

In a surprise announcement in the Spring Budget earlier this year, the Chancellor confirmed that the UK’s Lifetime Allowance (LTA) for pensions would be abolished from 6 April 2024. Given the complexities that the LTA could create for clients, advisors like Florin Pensions widely welcomed this announcement.

Legislation was already passed earlier this year to prevent individuals from becoming liable to pay the LTA charge from 6 April 2023 onwards. However, further changes are required, as the removal of the LTA impacts several different areas of UK tax legislation. The proposals issued by the government to date show that whilst the LTA is being abolished, the complexity surrounding the taxation of pensions is not.

In the Autumn Budget, the government confirmed that it will introduce the Autumn Finance Bill 2023 to implement the abolition of the LTA with effect from 6 April 2024. This gives limited time to digest the changes. The question also remains what future changes may occur if a Labour government were to come to power at the next General Election (which must be called no later than January 2025).

Legislation proposed in the Autumn Finance Bill 2023 does offer greater clarity on the future taxation of lump sums, death benefits and the tax treatment for future transfers to overseas pensions.

Two new categories of allowance are being introduced: the Lump Sum Allowance (LSA) and the Lump Sum and Death Benefit Allowance (LSDBA). The Autumn Statement also introduced an Overseas Transfer Allowance that will apply for transfers from a UK pension scheme to a QROPS from April 2024.

Lump Sum Allowance

The LSA restricts the maximum cumulative UK tax-free pension commencement lump sum (PCLS) you can draw from your UK pension pot(s) to £268,275 (25% of the current lifetime allowance of £1,073,100) unless you have a higher protected amount (for example with Fixed Protection 2016).

Lump Sum Death Benefit Allowance

The LSDBA is the fixed cumulative amount of lump sum payments that that can be paid to or in respect of an individual UK tax-free in life and death. The fixed limit is £1,073,100 (or any higher protected amount as above). PCLS and tax-free elements of UFPLS use up this allowance. Under the LSDBA when a death benefit is paid as a lump sum, it will only be UK tax-free if it falls below the deceased member’s remaining LSDBA. Any excess will be taxable at the beneficiary’s marginal rate of UK income tax. This applies regardless of the age when you die (e.g. pre or post age 75).

There is no provision for the LSA or LSDBA limits to be increased in future tax years in line with inflation.

In an earlier policy document released this year, it appeared that pensions paid from uncrystallised defined contribution funds on death before age 75 would no longer be excluded from marginal rate income tax. However, this decision has been reversed. These benefits will remain income tax free and won’t be tested against the new lump sum allowances noted above.

There will be transitional calculations if you have taken benefits before April 2024 to determine how that will translate to the new allowances. If you have used your full entitlement to the LTA prior to April 2024, you will not have any available LSA or LSDBA.

If eligible, you have until 5 April 2025 to apply for Fixed Protection and/or Individual Protection 2016 in order to receive a higher LSA and LSDBA limit. For Fixed Protection 2016, this would provide an LSA of £312,500 and an LSDBA of £1,250,000.

Over-shadowing the current government’s abolition of the LTA is the fact that the Conservatives are trailing in the polls. It is unclear what would happen to the LTA if Labour were to come to power at the next General Election. If Labour were successful, there is the potential for an emergency budget statement so that changes could come into effect from April 2025.

Please note that the Autumn Finance Bill 2023 is in draft at the time of writing this article and the information above is subject to change. HMRC is issuing newsletters on a regular basis providing clarifications on matters related to the abolition of the LTA so the above may not be current at the time of reading.