The Spring Budget 2023 Explained - A jargon free, expert guide by Boring Money
15 Mar, 2023
The 2023 Spring Budget was all about growth and “Back To Work”. The Chancellor also talked about Es a lot, reclassified nuclear energy as sustainable, allocated £200 million to potholes, put big money behind AI and ripped up the lifetime allowance for pensions.
Many of the policy measures announced are aimed at overturning disincentives to work – whether that’s increasing how much the over-50s in employment can save into a pension, or encouraging parents back to work with help with childcare costs. Supporting those with disabilities and those on long-term sickness was also highlighted as a way to get more people working.
Here’s a summary of key measures which impact us, and Boring Money’s CEO Holly Mackay gives her take on how it all measures up and what you need to do as a result of all these new rules.
The Economy
What’s changed?
The Chancellor was keen to put his best foot forward and grinned as he announced that the Office for Budgetary Responsibility (OBR) forecasts that we will not now enter a technical recession. The OBR forecast a contraction of 0.2% in 2023, returning to modest growth next year. The forecast is also that inflation will return to a much less hardcore 2.9% by the end of 2023.
Pensions
What's changed?
Up until now, the golden rule with pensions had been that every UK adult had a £40,000 annual allowance every tax year and they could save up to a maximum of £1.07 million in total - their ‘lifetime allowance’ - before incurring punitive tax charges on their savings. The Chancellor has dramatically ripped up the lifetime allowance – it no longer exists.
No changes to State Pension ages though. The minimum age at which you can access your State Pension is currently 66, with a rise to 67 timetabled for between 2026-28. The minimum age that you can access your private pension – currently 55 – is set to move to 57 from 2028, in tandem with the rise in the State Pension age to 67 in the same period.
However, there are three major pension changes to consider:
The annual pensions allowance is to increase to £60,000 per year. If you earn less than this, your contribution is limited to your annual income. If you earn more than this, you are limited to £60,000 a year BUT can also claim back unused amounts from the previous three years.
The lifetime allowance has been scrapped. This used to be a little over a million pounds, which meant that higher earners would pay punitive tax on any pension savings over this amount. This was a massive deterrent to better-off people – doctors were cited – continuing to work. Scrapping this is a massive deal and will incentivise many to stay in work for longer.
Third, and not read out but in the small print, the Money Purchase Annual Allowance has gone up from £4,000 a year to £10,000. What’s this? This is the amount that someone can pay into a pension every year, if they have already started to take some money out of it. So you can take money out, then later on pay a bit more back in.
One last point worth reminding readers about: the maximum tax-free cash payable from a pension remains at £268,275 - 25% of the current lifetime allowance.
Savings
What's changed?
The Chancellor kept his powder dry on ISAs and savings, saving the drama for pensions.
Here’s a recap. You can save tax-free with an ISA (Individual Savings Account). There are 4 types of ISAs for UK adults: Cash ISAs, Stocks & Shares ISAs, Lifetime ISAs and Innovative Finance ISAs, and you can put up to a total of £20,000 into ISAs (of any sort but no more than a total of £20,000) per tax year. So – you could pay £5,000 into a Cash ISA and £5,000 into a Stocks & Shares ISA, for example. But you can only pay into one provider for each type of ISA every tax year.
As you don’t pay tax on any interest or income or capital gains in an ISA, these are a great way to protect your savings. There’s currently no cap on the amount you can save in ISAs in your lifetime.
For savings in a regular savings account, there is also the Personal Savings Allowance. This means that basic rate taxpayers (20%) can earn £1,000 in interest on savings per year with no tax. It’s less generous for higher rate taxpayers, who can earn just £500 in savings interest a year without paying tax, and for additional rate taxpayers there is no relief at all.
And finally - dividend income that can be received tax-free outside of ISA and pensions was already whittled away in the Autumn Statement and will be halved from 5 April 2023 – going from the current £2,000 to £1,000. After April 2024, this will be reduced to a paltry £500.
Energy Costs
What's changed?
The Government has confirmed the extension for the Energy Support package until June 2023. This means the average (and note it’s the average, not a cap) household bill will remain at around £2,500. Wholesale energy costs are coming down and so - fingers crossed - our bills will start to ease and the regulator’s price cap will fall, bringing all of our bills down and removing the need for this government support.
Corporation Tax/R&D
What's changed?
There was a planned rise in corporation tax in the works from 6 April 2023 and this is confirmed. This will see businesses that generate profits of more than £250,000 pay 25% in tax, rather than the 19% they had to shell out previously. Smaller companies with profits of between £50,000 - £250,000 will get some relief and will pay less than the full 25%. The smallest companies, with less than £50,000 profit, will pay a lower rate of 19%.
The Chancellor did announce that full capital expensing will be supported – deductions on taxable profits immediately for the next three years. And there’s an enhanced credit – for firms which spend more than 40% of their money on research and development. This will be £27 credit for every £100 spent. This will be limited to bona fide tech and scientific developments but worth checking out.
Childcare Costs
What's changed?
Up until now, eligible families have been paid any childcare support in arrears, meaning they have had to stump up that initial outlay – which charities had warned risked them getting into debt. Under the previous Universal Credit system, working households could claim back 85% of childcare costs, up to a maximum of £646 a month for one child or £1,108 for two or more. And parents of the under 3s were neglected.
Some announcements were made in the Budget about the supply of childcare. There will be incentive payments for childminders joining the sector, and an increase of funding for childcare providers, as well as increasing the ratio of minder to children from 1:4 to 1:5. Wrap-around care at schools going later in the day will also be worked on.
The real headline grabbers are the changes to support for working parents. The government will now be paying childcare support upfront for families who claim Universal Credit. The Chancellor also stated he would raise the amount parents on Universal Credit can claim for childcare – the maximum amount will go up to £951 for 1 child and £1,630 for 2 children. This is an increase of just over 50%.
In eligible households where all adults work at least 16 hours, in future there will be 30 hours of free childcare for every child from 9 months and under 5. This will be introduced in stages so not everyone will be able to access the full 30 hours immediately.
Working parents of 2 year old rugrats will get 15 hours of free childcare from April 2024, and from September 2024, this will be extended to all children from 9 months up. From September 2025, this will be rolled out in full and every working parent with a child over 9 months and under 5 will be able to access up to 30 hours of free childcare every week.
Higher Rate Taxpayers
First up, hello to a bigger group of people. This coming tax year, we anticipate there will be 6.1 million higher rate and additional rate taxpayers. With inflation creeping up and tax thresholds frozen, here are three things higher-rate taxpayers might consider to minimize what they pay with no monkey business.
First up, pensions, pensions and pensions
Here’s the basic deal. The Government wants to incentivise us to save for retirement so they don’t have to foot the bill for us all in later life. So they effectively rebate us the tax we have paid on our income, if we pay this money into a pension. This is most exciting for higher rate taxpayers who get 20% back when they pay into their pension. And can then reduce their annual income by a further 20% of the contribution, when it comes to the annual tax return.
Assuming we earn more than £60,000, this is the amount we can now pay into a pension in any single tax year. And, if we have not used the previous three years’ allowances we can carry these forward. So if you're minted, and have ignored pensions, and are happy to tie your money up until your late 50s, you could pay in 3 x £40,000 (the previous annual limit) plus next year’s £60,000 = £180,000 into pensions in the coming months which would generate some amazing tax relief.
Even if your means are more humble, it’s still well worth investigating.
Second, use your allowances
In addition to pensions, consider Capital Gains Tax. Can you realise gains (i.e. sell investments) this year while the bigger exemption is available? Or move investments held in a taxable environment into ISAs, if possible, to shelter future returns from tax.
Read up on ‘Bed and ISA’. Which is basically asking your platform to shove general investments into the ISA wrapper (they are sold outside an ISA and immediately bought back inside an ISA). This uses some of your annual £20,000 allowance without requiring spare cash to pay into your ISA.
And who said romance is dead? Married couples can also transfer assets to whichever spouse might have spare allowances that can be used, or the person who pays lower rates of income tax.
Third, there are some higher-risk tax efficient investment options
With all the due risk warnings about these spicier options, you might consider investing more into tax efficient investments, such as Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and its younger sibling the Seed Enterprise Investment Scheme (SEIS). When you invest, you get income tax relief of between 30% (VCTs and EIS) and 50% (SEIS). Returns are also tax free.
Venture Capital Trusts (VCTs) offer up to 30% income tax relief. Returns are paid through regular tax-free dividends, and the allowance is £200,000 a year. Octopus Investments have some good information on these.
Enterprise Investment Scheme (EIS) investments also offer up to 30% income tax relief. There are no tax-free dividends, but you can also defer chargeable capital gains you’ve realised. For as long as you stay invested in any EIS, you can forget about any CGT which will only become payable once you exit the EIS (unless you re-invest the money into another). The basic allowance is a chunky £1 million a year.
The Seed Enterprise Investment Scheme (SEIS) is very compelling from a tax perspective. When you invest you can cut both your income and capital gains tax in half. The allowance is £100,000 which could save you up to £50,000 in income tax plus £14,000 capital gains tax. The allowance is set to double in the new tax year.
No pain, no gain and these investment types are suited to more confident and seasoned investors – do your homework.
Income Tax
What's changed?
Nothing new here and the changes to come in from April were all announced in the Autumn Statement.
If you live in England, your Personal Allowance is the amount you can earn in any one tax year without paying a penny in Income Tax (IT) to the government. This figure stands at £12,570, although it can go up if you claim Marriage Allowance or Blind Person’s Allowance. After this figure, basic rate tax kicks in up to £50,270, so you pay 20% if you’re in this bracket.
Today’s Budget revealed no backtracking on the frozen thresholds for basic rate tax and higher rate tax. And the planned reduction in the threshold at which the 45% band starts - from £150,000 currently to £125,140 from 6 April – will still go-ahead.
This means that a record 6.1 million people in the coming tax year will be higher and additional rate taxpayers – over 15% higher than the previous year. This is the impact of freezing thresholds.
The highest rate of tax is now 45%, applying to all individuals who earn over £125,140. This will pull more people into the additional tax band, especially as wages rise with inflation.
Inheritance Tax
What's changed?
No changes that we noted. Inheritance Tax (IHT) kicks in when the value of your ‘estate’ (that’s all your property and possessions when you die) surpasses £325,000 – although, of course, not everyone’s estate hits this threshold. If it does, the taxman charges 40% IHT on everything above this figure.
However, if you leave your spouse or civil partner everything in your will that is valued over the IHT threshold, then there’s no tax to pay at all. The same applies if you leave everything to a charity or an amateur sports club. And if you leave your home to your children or grandchildren, the tax-free threshold increases to a more generous £500,000 (this includes adopted, foster and step-children too). Plus – good news for partners – if you’re married or in a civil partnership and your estate is worth less than £325,000, any unused amount below this figure can be added onto to your partner’s threshold when you die.
You can also make further savings by leaving 10% or more of the ‘net value’ of your estate(the total value minus any debts) to a charity in your will, which means you qualify to pay Inheritance Tax at a reduced rate of 36%. And further still, to reduce the amount of IHT you’re liable to pay, you can gift assets to friends and family while you’re alive – as long as it is 7 years before you die - so that they aren’t considered part of your estate (and therefore taxable). This is a little bit complicated so we recommend checking out the exact rules on the GOV.UK website.
Nothing changed in the Budget to directly impact Inheritance Tax, however the changes to the pensions lifetime allowance (scrapped) can make proper planning even more vital for people who know have some more tools at their disposal to take advantage of.
Capital Gains Tax
What's changed?
Capital Gains Tax (CGT) is a tax on the profit you make when you sell (or ‘dispose of’) something (an ‘asset’) that’s gone up in value – such as shares, a second property, or a valuable personal possession. You don’t have to pay CGT if your total profit over the tax year remains below the annual allowance, which was £12,300.
There are lots of complicated rules around CGT and how it’s applied. For example: married couples and civil partners can transfer assets to each other or to a charity without incurring CGT; any losses you make can be offset against your gains and possibly result in a smaller CGT bill; and good news if you have an ISA, as you don’t have to pay any CGT on your gains! To get the full picture on how CGT works and how you might be liable, head to the GOV.UK site for more information.
Nothing changed in the Budget but it is worth reminding ourselves of what lies ahead. As announced in the 2022 Autumn Statement, the big deal is that the tax-free allowance of £12,300 for the 2022-23 tax year will be dramatically cut to £6,000 from 6 April 2023, and from April 2024, it will be reduced again to just £3,000. It’s half this amount for trusts.
Mortgages/Stamp Duty
What’s changed?
In short, nothing new to report here. The Stamp Duty rates as announced in the Autumn Statement on 23 September 2022 will remain the same until 31 March 2025.
If you’re buying a residential property or piece of land in England or Northern Ireland, you’ll have to pay Stamp Duty Land Tax (SDLT) if your purchase is over the threshold of £250,000.
On the next £675,000 of the property’s value (the portion from £250,001 to £925,000), the stamp duty due is 5%. The next £575,000 (the portion from £925,001 to £1.5 million) sees you pay 10% in stamp duty. And for the remaining amount (the portion above £1.5m), the stamp duty rate is 12%.
If you’re an eligible first-time buyer, you will pay no Stamp Duty on properties costing up to £425,000, and a discounted rate on property purchases up to £625,000. This tax applies to both freehold and leasehold properties – whether you’re buying outright or with a mortgage.
Child Benefit
What's changed?
In short – nothing new here that we’ve seen. Currently, you get Child Benefit if you’re responsible for bringing up a child who is either under 16 or under 20 and in full-time education or training. There are two benefit rates – for the first/only child, you get £21.80 a week, and for subsequent children the rate is £14.45 a week per child.
Importantly, you get National Insurance credits automatically if you claim Child Benefit and your child is under 12. Having these ensures there are no gaps in your National Insurance record if either you’re not working or you’re not earning enough to pay National Insurance contributions (i.e. less than £12,570) which means you will get the full state pension when the time comes. Important point. As a rule of thumb, the parent not working should claim – to keep those valuable National Insurance contributions going which get you a State Pension.
However, if you or your partner earn over £50,000, your Child Benefit starts being gradually reduced, to the point that if you earn £60,000 or more, you don't receive any child benefit at all. This policy is called the High Income Child Benefit Charge (HICBC).
The HICBC is only based on the income of one parent. So if both parents earn £50,000, they’ll get the full Child Benefit, but if one parent earns £60,000 and the other earns less, isn't working, or they’re a single parent, they don't get any Child Benefit at all. Plus, it’s up to parents to inform HMRC when they start earning more than the £50,000 allowance – and if you don’t, you can be fined.
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