UK Spring Budget 2023

Chancellor Jeremy Hunt has now delivered his statement on UK tax and spending. Out of the past five Chancellors, he is only the second to hold the iconic red box outside No. 11 Downing Street.

There has been very little in the press in the run-up to this Budget with many speculating that this is deliberate in order to give a message of stability following the recent turmoil in the Conservative Party.

Two of the three key announcements relating to personal tax changes are in respect of pensions, whilst the third relates to Carried Interest:

  • The pension contribution Annual Allowance has been increased from £40,000 to £60,000. From April 6, 2023, the Annual Allowance will be tapered if, broadly, your annual income is more than £260,000. The minimum tapered Annual Allowance you can have has been increased from £4,000 to £10,000. In line with this, the Money Purchase Annual Allowance (applicable to those who have started to access their defined contribution plans or Qualifying Overseas Pension that has had UK tax relief) has also been increased from £4,000 to £10,000.
  • The pension Lifetime Allowance has been abolished so there will be no limit on the amount that can be saved. Previously the limit was £1,070,000.
  • A proposal to include a provision in the Carried Interest legislation to enable “any individual who expects to receive carried interest to make a voluntary and irrevocable election for their carried interest to be taxed in the UK on an accruals basis”. This is intended to mitigate the potential double taxation that might otherwise arise when Carried Interest is recognized and charged to tax at different times in two jurisdictions.

As expected there appear to have been no changes to the measures already announced in 2022. As a reminder, here are some of the headlines affecting individual taxpayers that would be part of the Finance Act 2023:

  • Income tax basic rate thresholds the income tax basic rate band (income between £12,571 and £50,270) will remain unchanged until April 6, 2028. 
  • Income tax additional rate threshold: the income tax additional rate threshold, at which income tax starts to be charged at 45%, will be lowered from £150,000 to £125,140 with effect from April 6, 2023.
  • The income tax personal allowance (£12,570 for 2022/23), National Insurance thresholds and Inheritance Tax threshold will be maintained until April 2028.
  • Dividend allowance: The dividend allowance for income tax will be reduced from £2,000 to £1,000 with effect from April 6, 2023 and then reduced again to £500 for the tax year 2024/25.
  • Capital gains tax (CGT) annual exempt amount: this will be reduced from £12,300 to £6,000 with effect from April 6, 2023 and it will be reduced further to £3,000 with effect from April 6, 2024

US & UK interaction – planning opportunities

For Americans living in the UK who are taxed on their worldwide income, the UK will continue to drive their tax exposure as the UK tax rates are generally higher compared to the US federal rates. 

It is as important as ever for people with dual US/UK tax exposure to seek advice to manage their tax positions. To achieve this we work closely with investment and wealth managers as well as other advisors to help our clients deal with the implications of being US and UK taxpayers.

Below we consider three common ways in which individuals might reduce their UK tax liability although, before taking any action, appropriate advice should be sought regarding the potential US tax implications.

  • Pension contributions: following the Chancellor’s announcement today people might want to increase their pension savings. UK tax relief is available for personal and employer pension contributions. However, if you are a high earner, care should be taken not to exceed the increased Annual Allowance amount.

US tax relief might also be available under the US/UK Double Taxation Agreement for contributions to UK pension plans. The benefits of claiming a deduction under the treaty seem obvious, but in some cases, it might be more advantageous to forgo a treaty claim. This could be an opportunity to utilize excess foreign tax credits to absorb the US tax on the contributions and result in a US tax-free basis in the pension. This could represent a significant tax saving at the distribution phase depending on how the pension is distributed and where you reside at the time.

Attention should be paid to US Owners of personal pension plans as they may trigger additional filing requirements. 

  • Charitable giving – UK tax relief can be obtained for qualifying charitable donations. For dual US-UK taxpayers, we can assist with making dual-qualifying US-UK donations which are eligible for tax relief in both jurisdictions.

Read more at US & UK tax tips for charitable contributions.

  • Savings and investments – both the US and the UK have punitive tax rules for certain investments; the Passive Foreign Investment Company (“PFIC”) rules in the US and Offshore Income Gain (“OIG”) regime in the UK. It would be prudent to check whether these rules apply to you when making investment decisions, otherwise you might have an unexpected tax liability when you receive distributions or sell the investments.

For example, read more about the US’s PFIC regime at Passive Foreign Investment Company (PFIC).

  • Tax-efficient investments – it is possible to make UK tax-efficient investments through the Enterprise Investment Scheme (“EIS”), Seed Enterprise Investment Scheme (“SEIS”) and Venture Capital Trust (“VCT”). The Chancellor confirmed today that the limits on these schemes will not be changed.

As always, consideration should be given to the US tax impact and reporting obligations that might arise as a result of investing in these schemes. Making UK tax-efficient investments is likely to only reduce your UK tax liability and not your US liability, but this might create the opportunity to utilize otherwise unused Foreign Tax Credits on your US return.

If you would like to discuss your US and UK tax position, including how the changes announced today might impact your situation, please contact us.

Article written by Johana Regatuso and Harry Swift.