lumin news Issue 8 / Summer 2023

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Page 4 lumin news 8 / summer 2023 Spring Budget: Take advantage of generous tax breaks for pensions The Chancellor’s Spring Budget has provided a significant personal taxation boost for higher earners and savers with large pension pots. PETER FLOWERS Senior Financial Consultant peter.flowers@luminwealth.co.uk Phone 01727 893 333 The Spring Budget included several valuable breaks and benefits for higher earners, retirees, and savers with large pension pots. But what were the tax changes, and how can you make the most of them? Lifetime allowance abolished The pension lifetime allowance (LTA) of £1,073,100, the maximum that can be saved into pensions without incurring extra tax, has been abolished. The 25% or 55% tax charge on amounts exceeding the threshold was removed from 6 April. This is great news for savers with large pension pots, who can continue, or resume, payments into their pension – and benefit from tax relief on their contributions – without the risk of How higher annual contributions can boost the size of your pension pot Assumptions: 50-year-old with a current pension pot of £500,000; planned retirement at age 65; 3% investment growth p.a. after fees. Pension pot size (illustrative) £3,000,000 £2,500,000 £2,000,000 £1,500,000 £1,000,000 £500,000 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 £40,000 contribution £60,000 contribution exceeding the LTA on certain test occasions, such as when drawing pension benefits, or at age 75. The tax-free cash lump sum entitlement will remain at £268,275, which is 25% of the original lifetime allowance. However, those savers who benefit from fixed protection can pay into their pension again and won’t be subject to the £268,275 cap, meaning they will benefit from their higher tax-free cash entitlement. Years Paying more into your pension The standard pension annual allowance has risen from £40,000 to £60,000 per year. This 50% increase provides a valuable incentive for savers to pay more into their pension (or to get their company to pay) and benefit from tax relief on their contributions and a larger pension pot. The example illustration (see above) highlights how higher annual pension contributions can substantially boost the amount saved into this important asset over time. The annual allowance includes your personal /employee payments, as well as employer contributions. Regular or one-off pension contributions can help to substantially reduce your taxable income, particularly for higher and additional rate taxpayers, or if your earnings are between £100,000 and £125,140 and have an effective marginal income tax rate of 60% (due to the loss of the tax-free personal allowance of £12,570). Boost for retirees Once pension benefits are being drawn, tax relief on contributions is limited to the ‘money purchase annual allowance’. This increased from £4,000 to £10,000 as of 6 April. The increase to the allowance may provide retirees with an incentive to return to the workplace, where they would benefit from mandatory employer pension contributions. Effective use of pensions and other tax wrappers forms the backbone of a robust financial plan. Call 03300 564 446 to speak to a Lumin expert. Key tax changes for pensions Tax aspect New rules Lifetime allowance (LTA) Excess tax charge removed from 6 April 2023; LTA to be abolished entirely from April 2024 Standard annual allowance Increased from £40,000 to £60,000 from 6 April 2023 Money purchase annual allowance Increased from £4,000 to £10,000 as of 6 April 2023 Tapered annual allowance Adjusted income threshold rose from £240,000 to £260,000 from 6 April 2023 FACTSHEET Tax-saving tips for pensions Request a free factsheet via enclosed response card, info@luminwealth.co.uk or call the Lumin team on 03300 564 446
lumin news 8 / summer 2023 Page 5 What can business owners consider under the higher tax regime? Company directors face a challenging tax climate. But prudent financial planning can help to mitigate tax bills and boost retirement assets. KRIS FISHER Financial Consultant kris.fisher@luminwealth.co.uk Phone 01727 893 333 The standard rate of corporation tax has risen from 19% to 25%, while the dividend allowance of £2,000 has been halved, and is set to be halved again for the 2024 /25 tax year. Dividend tax rates also remain high. What can company directors do to reduce tax and optimise their finances under these circumstances? Increase to the standard corporation tax rate The corporation tax rate has increased from 19% to 25% as of 1 April 2023 for limited companies with profits exceeding £250,000. Companies with profits between £50,000 and £250,000 can benefit from tapered relief (see table below). Company directors with high profit levels may wish to consider strategies to extract profits from the company in a tax-efficient manner. Taking a salary It is very common for company directors to take a salary that is equal to, or less than, the personal allowance limit (this is currently £12,570), but above the ‘lower earnings limit’ (which is £6,396 for the 2023/24 tax year). This allows directors to build up qualifying years for their State Pension, without actually paying any National Insurance contributions. Salaries also count as an ‘allowable expense’, so a company director can pay themselves a salary to reduce their corporation tax bill. Corporation tax rates have increased 2022/23 2023/24 Companies with profits under £50,000 19% 19% Companies with profits over £250,000 19% 25% Companies with profits between £50,000 and £250,000 19% 19 – 24.99% (tapered) Changes to the tax-free dividend allowance Tax year Dividend tax rates are currently high Dividend tax rates remain high. A planned 1.25% reduction to 2023/24 dividend rates was cancelled in October 2022, with rates currently 8.75% for basic rate taxpayers, and 33.75% and 39.35% for higher rate and additional rate taxpayers respectively. The tax-free dividend allowance, which was formerly £2,000, has been cut to £1,000 for 2023/24, and is set to be reduced to £500 from 2024/25 (see the table above). Dividends are paid out of retained profits, on which corporation tax has already been paid. This could mean there are less dividends to distribute once a tax charge of 25% has been applied. A thorough review of various income strategies and streams may be able to help company directors substantially reduce their tax bill. Pension contributions can help reduce tax For a company director, paying into a pension via employer contributions can be a tax-efficient way of extracting profits from their business, while saving more towards retirement. Pension contributions are an allowable business expense, resulting in corporation tax savings. Another significant benefit is that employers can also save on the 13.8% National Insurance tax charge by contributing directly into a pension, rather than paying it on a salary. Making a large payment with carry forward You can now contribute up to £60,000 to your pension per year, unless you are a higher earner and subject to a tapered annual allowance. The maximum contribution with tax relief can be up to £180,000 in a single tax year, if you have unused allowances from the prior three tax years and were a member of a pension plan. You must use up your annual allowance from the current tax year before carrying forward. Unlike personal contributions, employer contributions via the company are not restricted by relevant UK earnings. With the right financial planning, business owners can reduce tax and boost retirement outcomes. To find out more please call 03300 564 446. FACTSHEET Dividend allowance 2022 / 23 £2,000 2023 / 24 £1,000 2024 / 25 £500 Your options for your pensions Request a free factsheet via enclosed response card, info@luminwealth.co.uk or call the Lumin team on 03300 564 446
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lumin news Issue 8 / Summer 2023

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