What the 2023 budget means for you
After a torrid 2022 for Budgets and U-turns, this week’s Budget statement from Chancellor Jeremy Hunt was positively calm.
After stating that the British economy will avoid ‘technical recession’, defined as two consecutive quarters of negative growth, Hunt added that inflation will fall back to 2.9 per cent by the end of the year.
He described the British economy as “proving the doubters wrong” and added that “prosperity with a purpose” was a government priority. Hunt also said that the tax burden would be slightly lower than predicted in the latest report from the Office for Budgetary Responsibility.
He then announced several measures that will influence our personal finances. Here are some of the most significant.
For pension savers
Pension lifetime allowance scrapped.
One of the biggest surprises in the Budget was Hunt’s decision to scrap the pensions Lifetime Allowance (LTA) altogether. The allowance, best defined as the amount that your collective pension pots could grow to before facing a tax charge, had been reduced to £1,073,100. It was once £1.8m, so this was a significant cut.
The LTA had become an issue for those with final salary pensions, with doctors and other professionals discovering it no longer made financial sense to work and accrue more pension contributions because of the tax.
Scrapping the LTA altogether was unexpected. The move means that no-one will need to worry about paying extra tax if their pension investments rise significantly.
However, the amount you can withdraw tax-free from the pension (usually 25 per cent of a total pension pot) is capped at £268,275, no matter how large your pension grows over time. This is a change to previous rules which allowed pension savers to withdraw 25% of their total pension pot tax free.
Pension annual allowance moves to £60,000
While there is no tax penalty if your pension goes over a certain amount, there are still restrictions over how much you can put into a pension each year. However, Hunt raised the Annual Allowance (the amount you can put into your pension annually) from £40,000 to £60,000.
This is particularly helpful for those who want to ‘catch up’ on missed pension saving in other years, for example if they’ve sold a business and realised a gain that they want to put into a pension.
Reform of Money purchase annual allowance
Aimed at encouraging older people back into the workforce, the reform of the Money Purchase Annual Allowance (MPAA) means that those who have already accessed their pensions can put more money back into them.
Those who had flexibly accessed their pensions were previously only able to put £4,000 into them a year. This rises to £10,000 a year under the new rules.
For households and families
Energy bill support continued
The current Energy Price Guarantee, which caps the cost of energy so that the average annual bill is £2500 will be retained for a further three months. This was due to rise in April, and the Government says that the move will save the average family £160.
Lower energy prices are forecast this summer, so the hope is that by the time the guarantee runs out, most bills will be lower.
“This temporary change will bridge the gap and ease the pressure on families, while also helping to lower inflation,” Hunt said.
Those on prepayment meters will also no longer pay more per unit for gas and electricity.
Free childcare expanded and wraparound care extended
Hunt provided some help for struggling families of young children by announcing plans that will cut the cost of childcare. However, they may take a while to feed through.
At present, most children over three get 30 hours of free childcare, as do some children over two. The Chancellor is extending this so that the free childcare will cover all children over nine months by September 2025.
There are extra changes for those on Universal Credit, who will be able to get their childcare support upfront rather than claiming it back and will be able to claim more per child.
Those earning over £100,000 are not eligible for the free hours
Hunt is also increasing the amount nurseries will receive and will fund bonuses for childminders to deal with the problem of lack of carers to provide these hours.
The Government is also proposing extra ‘wraparound’ childcare for families but is providing only a small amount of funding for this.
Fuel frozen but alcohol rises
The current freezes in fuel duty will continue for another year. Fuel duty was cut by 5p a litre last Spring, and this is continuing.
However, there’s less of a relief for alcohol drinkers. Alcohol duty will rise with inflation in August, after several years of freezes, in a move that could add 45p to the cost of a bottle of wine.
However, there is extra help for pubs, who will benefit from ‘Draught Relief’ so that ciders and beers on draught in pubs will benefit from 11p less duty than those sold in supermarkets.
As well as changes to pensions, Hunt introduced several other measures to persuade people back into the workforce.
These include apprenticeships for older people (dubbed ‘Returnerships’) and double the number of mid-life career MOTs for over 50s who are out of work.
There will also be a new voluntary employment scheme for disabled people, with 50,000 people a year given help worth up to £4000 to find appropriate jobs.
Benefits will be tweaked so that disability benefits are assessed separately from benefits entitlement, so that those with a disability are able to seek work without losing financial support.
The increase in corporation tax from 19pc to 25pc from April will go ahead, Hunt announced. The increase is tapered, however, with businesses with less than £50,000 in profits still taxed at 19pc, and only those with profits over £250,000 paying 25 per cent.
However, there were tax incentives for some businesses, too including a plan to allow “qualifying small or medium-sized” firms that spend 40 per cent of their total expenditure on R&D to claim credit worth £27 for every £100 they invest.
Hunt also announced the creation of new ‘investment zones’ where businesses will be able to benefit from lower tax rates. There’s more detail on this policy here.
As well as these big headline changes, there are other small changes in the documentation with the Budget that could affect your personal finances. This includes.
- A requirement to report income and gains from crypto assets separately on your self-assessment tax return
- A change to the taxation rules, giving divorcing couples three years to transfer assets without capital gains tax complications
And one that didn’t happen…
Many were expecting an announcement on a change to state pension age in the Budget after a review was announced in November with the outcome expected in ‘early 2023’. This was not announced, despite speculation that state pension age could rise to 68 sooner than expected.
15th March 2023