The Chancellor of the Exchequer, Jeremy Hunt, today unveiled this year’s Spring Budget. Announced against a backdrop of high inflation, an ongoing cost-of-living crisis and mass industrial action, the Chancellor confirmed that his primary aim is to boost growth, an important driver for which is encouraging people back to work. This blog post sets out a high-level summary of the key measures from an employment, pensions and incentives perspective.
Pension tax thresholds
- Annual Allowance (AA). In an attempt to encourage older workers (particularly skilled professionals) to remain in or return to work, the AA (the cap on ‘tax-free’ annual pension contributions, which has been frozen for almost a decade) will increase from £40,000 to £60,000 p.a from 6 April 2023. The Spring Budget document confirms that individuals will continue to be able to carry forward unused AAs from the three previous tax years.
- Money Purchase Annual Allowance (MPAA). Alongside this, the MPAA (the amount of ‘tax-free’ money that individuals can contribute to their defined contribution pensions after they have started flexibly accessing them) will increase from £4,000 to £10,000 p.a and the minimum Tapered Annual Allowance (TAA) (the mechanism by which the AA for individuals who meet certain threshold income and adjusted income requirements gradually reduces by £1 for every £2 of adjusted income above a threshold) will also increase from £4,000 to £10,000 p.a from 6 April 2023. The adjusted income threshold for the TAA will also be increased from £240,000 to £260,000 from 6 April 2023.
- Lifetime Allowance (LTA). It was expected by commentators that the LTA (the 'tax-free' cap on how much an individual can build up in pension benefits over their lifetime) would be increased from £1,073,100 to £1.8m in today’s Spring Budget, but the Chancellor went one step further by removing it altogether. Therefore, from 6 April 2023, the LTA charge will be removed, and the LTA will be fully abolished in a future Finance Bill. This measure, alongside the proposed changes to AA and MPAA, represents a significant shake-up of the pensions tax regime which will particularly affect high earners.
- Pensions Commencement Lump Sum (PCLS). Finally on pension tax thresholds, the maximum PCLS (the ‘tax-free’ amount of money available as a lump sum when a member takes their benefits) for those without protections will be retained at 25% of the current LTA (£268,275) and will be frozen thereafter.
- Linking open and closed public service pension schemes. To add to the above measures, open and closed public service pension schemes for a given workforce will be considered linked for the purposes of calculating AA charges, allowing members to offset any negative real growth for AA purposes in legacy public service pension schemes against AA. This will be legislated for through secondary legislation.
Pension scheme investment
- The Government is considering measures to unlock innovative company and other productive asset investment from defined contribution pension funds and other sources. As part of this, it will consult on proposed requirements for Local Government Pension Scheme funds to transfer all listed assets into pools by March 2025.
Tax-advantaged share schemes
- Share Incentive Plan (SIP) and Save As You Earn (SAYE) schemes. A call for evidence will be launched on SIP and SAYE schemes to consider opportunities to improve and simplify them. Judging by a September 2022 parliamentary debate on potential reforms of employee share ownership schemes, the types of suggestions the Government might be considering include: allowing SAYE schemes to have a one-year savings period in addition to the current three or five years; reducing the SIP holding period from five to three years; allowing awards of free shares targeted at lower-income employees; and developing a new type of scheme to allow participation of workers in the gig economy by not requiring regular monthly contributions.
- Enterprise Management Incentive (EMI) schemes. The Spring Budget document also confirms that the Government will simplify the process to grant options under EMI schemes. 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. As part of this, the Government published a call for evidence summary of responses.
Encouraging people back to work
- Finally from a people and reward perspective, the Spring Budget proposes a variety of policies to encourage people – in particular the over 50s, the long-term sick, the disabled and benefits claimants – back into the workplace. These include measures regarding: occupational health services at work; childcare for working parents; disability support; and ‘returnerships’ (apprenticeships targeted at the over 50s). Alongside this (and as recently confirmed in a House of Lords debate), the Government is supporting Private Members’ Bills as the method by which various employment-related legislative changes will be implemented. These include changes focused on: flexible working; redundancy protection for pregnancy; family leave; carer’s leave; and neonatal care leave. The Spring Budget document confirms that the Government will bring forward a call for evidence in summer 2023 on informal and ad hoc flexible working.
Last year’s mini-Budget and Autumn Statement announcements (see here and here) were broad and significant. Many commentators predicted that today’s Spring Budget announcements would be less so, but many of the measures will have important consequences for businesses, individuals and pension schemes across the UK. For more information on these measures, please speak to the authors of this blog post or your usual Freshfields contact. Further detail on the key tax takeaways is available here and here.