Spring budget 2023: Significant pensions changes announced

Spring budget - Some key announcements

The Chancellor has delivered the Spring budget 2023. Of interest to employers will be the abolition of the pensions lifetime allowance and the increase in the pensions annual allowance, along with other measures designed to increase employment by getting more people into work, increasing their hours and enabling them to work for longer.

Pensions: abolition of the lifetime and annual allowances

The Chancellor announced some important changes to the pensions tax system which significantly exceed the pre-budget expectations of the pensions industry. The principal, and headline change is a decision to abolish the pensions lifetime allowance (LTA) which limits the amount individual savers can accrue in their pension funds (without incurring a tax penalty) to just under £1.08m. As well as this, the personal annual allowance (the maximum amount that someone can contribute to a pension scheme without incurring a charge to tax) will rise from £40,000 to £60,000 per annum, and the money purchase annual allowance (MPPA ) – the amount that a saver who has accessed their pension flexibly from age 55 onwards – can contribute will also go up, from £4,000 a year to £10,000 a year.

The immediate reaction from industry observers is that this is a very welcome, and long overdue move on the part of the government. The LTA has long been criticised as overly complex, not least because it is calculated by reference to the total value of one person’s pension savings across multiple schemes, which runs the risk of triggering inadvertent tax charges if the LTA was accidentally breached due to, say, investment growth. It has also been seen as profoundly unfair to savers, and out of step with both the annual allowance levels and the general push over the past decade, via pensions auto-enrolment, to encourage greater levels of workplace pensions savings. Whereas, when the LTA and annual allowances were originally introduced, it was possible to save over £250,000 per annum in a pension scheme (and so it seemed sensible to place a total cap on the level of savings that could be accrued in a pension scheme) the continuation of the LTA appeared much harder to justify when the annual allowance has been trimmed down to such a large extent, meaning that savers were only able to save at a reduced rate in the first place. From a longer term perspective, the changes also have the objective of keeping older people in work for longer, given the relatively high levels of economic inactivity in the over 55 population. All of this appears, on the face of it, to be good, sensible politics which will benefit many older people who will be able to continue working, but who would have otherwise have been forced to consider retirement due to the tax inefficiencies of their own pensions position. It is worth noting, however, that the maximum tax-free lump sum that an individual can take from their pension will remain at the current maximum level of £268,275.

The abolition of the LTA will take effect in the first instance by the removal of the relevant tax charges associated with the LTA from April 2023 and then by removal of the LTA itself from 2024.

If you have any questions around any of the budget pension changes, then please contact Andy Campbell in the first instance.

Extended childcare

For parents of young children, the government plans to extend free childcare to encourage parents back to work. Currently, eligible parents are entitled to 30 hours of free childcare for three to four year-olds. From April 2024, working parents of two year-olds will be able to access 15 hours of free childcare per week. This will be extended to working parents of 9 month to 2 year-olds from September 2024 and from September 2025, all eligible working parents of children aged from 9 months up to 3 years will be able to access 30 free hours of childcare per week. Eligibility requirements will match the existing criteria for parents of three to four year-olds.

To enable parents to continue to work once their children start school, the government is also launching a new wraparound childcare pathfinder scheme with the aim of enabling all parents of primary-aged children in England to access care in school from 8am-6pm. It hopes for a roll out of the scheme over academic years 2024-25 and 2025-26.

Occupational health services

The government want to encourage employers to support sick people back into work, to increase the hours they work, and to prevent them falling out of work. It will consult on boosting occupational health provision by employers, including, for example, through regulations requirig employers to provide occupational health services. It will also consult separately on on options for incentivising greater take-up of occupational health provision through the tax system.

Informal flexible working

The government will launch a call for evidence in Summer 2023 on informal and ad hoc flexible working to better understand informal agreements on flexible working between employees and employers. The government is already planning to make changes to the formal statutory right to request flexible working, including removing the requirement to have 26 week’s employment before qualifying for the right. You can read more about the changes here.

Other measures announced in the budget of interest to employers include:

• Non-discretionary tax advantaged share schemes: The government will be launching a call for evidence on the Share Incentive Plan (SIP) and Save As You Earn (SAYE) employee share schemes and will use the call for evidence to consider opportunities to improve and simplify the schemes.
• Enterprise Management Incentives (EMI): The government plans to simplify the process for granting options under an EMI scheme. From April 2023, the requirement for a company to set out details of share restrictions within the option agreement and the requirement for a company to declare an employee has signed a working time declaration will be removed. From April 2024, the government will extend the deadline for a company to notify HMRC of the grant of an EMI option from 92 days following grant, to the 6 July following the end of the tax year.