Several months have passed since the Spring Budget, which, although not necessarily packed with good news stories, held one announcement that certainly did bring considerable cheer to higher rate taxpayers. A recent survey has revealed the dramatic impact that Chancellor Jeremy Hunt’s decision to scrap the pension Lifetime Allowance (LTA) is having on people’s retirement planning strategies.

Purpose of the move
In his first Spring Budget Statement delivered on 15 March, the Chancellor announced that the LTA charge would be removed from April 2023 and that the LTA would be abolished altogether from April 2024. This decision was essentially designed to remove a disincentive for retirement saving amongst higher earners and dissuade an increasing number of this group from retiring early.

Boosting pension contributions
New research* suggests the change has already had a significant impact on higher earners’ pension saving and retirement planning decisions both in terms of spurring more  contributions and encouraging retirement delays. According YOUR WINDOW ON WEALTH to the survey, 51% of higher rate taxpayers have restarted, increased or made plans to increase their pension payments since the announcement, with average additional payments amounting to £650 a month.

Extending working lives
In addition, 23% of respondents said they had delayed their planned retirement or are likely to delay their retirement due to the fact that they can now save a higher amount in their pension pot without facing a heavy tax charge. Furthermore, around 10% said they had actually come out of retirement as a result of the change, while another 6% were planning to come out of retirement.

Advice is paramount
While abolition of the LTA has undoubtedly simplified some decisions in relation to retirement and estate planning, it has also effectively increased the need for clients to seek professional advice on their pension arrangements due to the change in tax treatment. There is also always an element of political risk in financial planning which means clients may need to act quickly if they are to make the most of the opportunity the Chancellor has provided.
*1Investec, July 2023

With the UK in the midst of a sharp tax-raising drive, understanding the full impact of fiscal changes on investments has arguably never been so critical. One area that has been  subject to particularly draconian reductions is Dividend Allowance, with changes in this area likely to have a significant impact on many investors.

Six-year slide
The annual tax-free Dividend Allowance was first introduced in 2016/17 and originally stood at £5,000. In 2018/19, it was reduced to £2,000, and was then halved to £1,000 from the start of the current tax year. This figure is set to halve again next April to stand at £500 – overall, this equates to a 90% reduction in the value of the allowance in the space of just six years.

Implications
Once an investor uses up their annual allowance they are liable for Income Tax on dividends, with the rate payable based on the Income Tax band they fall into. These changes will therefore inevitably increase the tax pressure on any individuals who own significant dividend-paying stocks or rely on dividends as a primary source of income.

Other options
The Dividend Allowance is just one of the tax-free allowances investors can utilise in the UK. As a result of the cuts, it could therefore be increasingly beneficial for dividend-heavy investors to explore routes that offer exemption from dividend tax on qualifying shares, such as ISAs (which are also free of Capital Gains Tax). Alternatively, it may be appropriate for some investors to consider equity options that prioritise long-term capital growth over dividend payments.