Autumn Statement – November 2022
In November 2022, the UK’s fourth Chancellor in the last three months has delivered the UK’s latest Autumn Statement and whilst it should provide a boost for the Treasury; and the initial reaction from the markets has been positive, the cost, which is huge is being funded primarily by the taxpayer.
The headlines were inevitably the spending commitments, however, as is often the case, the devil is in the detail, and there is a lot of detail. Changes to Capital Gains Tax (CGT), the Dividend Allowance and Inheritance Tax (IHT) are hugely significant for those with accumulated wealth, and will see the ‘taxman’ take a growing share of private wealth to help plug the gap in the nation’s finances. This ultimately means that our clients will potentially be liable to more tax to be paid on investments, but it also means it is more important than ever to review your arrangements, to ensure that you navigate the UK’s ever more complicated tax system.
Many people with capital they want to preserve for the benefit of themselves and their family will now need extra support to understand how today’s changes impact their personal financial situation. The upcoming changes to the Dividend Allowance and the Capital Gains Tax Annual Exempt Amount, as well as Income Tax on the highest earners will all have a significant impact. The government’s estimates published today suggest the CGT reforms alone will raise around £440 million a year by 2027/28, highlighting the massive scale of this tax raid on client wealth.
Here are some of the key announcements made today by the Chancellor Jeremy Hunt:
Dividends
The tax-free allowance on dividends will be cut to £1,000 from next year and £500 from April 2024. It means someone with a portfolio of £20,000 that yields 5% a year will hit the lower tax-free allowance of £1,000 from April next year, while someone with a portfolio of £10,000 that yields 5% a year will hit the tax-free allowance of £500 from 2024.
For those with unused ISA allowance this creates an added incentive to shelter their investments, or utilise their pension if they can afford to tuck their money away for longer. Some company directors may also reassess whether there is a tax benefit to running their own business, which doesn’t exactly play into the Government’s drive to boost GDP and create more home-grown businesses.
Slashing the Dividend Tax Allowance but keeping the Personal Savings Allowance untouched also creates an uneven playing field where you can earn more tax-free in savings income each year than you can in dividend income.
Capital Gains
The tax-free allowance for Capital Gains Tax had already been frozen until 2026, but the Chancellor has now opted to cut the allowance.
It will see the current £12,300 allowance cut by more than half to £6,000 from next April, and then again to £3,000 in April 2024. The move will mean that investors will pay an extra £25 million in tax from next year and another £275 million the year after.
A basic-rate taxpayer with gains over the current tax-free limit will face an additional cost of £630 from next year, while an additional rate payer will be paying £1,260 more in tax. This ratchets up to an extra £930 for a basic-rate taxpayer the year after, or £1,860 for a higher-rate payer, when compared to the current system.
Those selling a house or flat that isn’t their main residence will face an even bigger hit courtesy of the 18% and 28% rates on property for basic and higher rate taxpayers.
Anyone who hasn’t used their current Capital Gains Tax allowance could consider cashing in gains before the tax-year end in April, while those with ISA allowance remaining might utilise a ‘bed-and-ISA’ transaction to sell investments up to the maximum gain of £12,300 and rebuy them within their ISA.
Inheritance Tax
The freeze on the IHT nil rate band will now be extended from 2026 to 2028 and will mean that the £325,000 tax-free allowance will be unchanged for almost two decades.
Although just 1 in 25 deaths led to Inheritance Tax being paid last year, it is still one of the UK’s most hated taxes and freezing the threshold will now see more people dragged into its net.The move today by the Chancellor will increase the importance of estate planning for those seeking to mitigate the impact of IHT.
Income Tax – additional rate threshold
Incredibly, just two months ago the highest earners were celebrating the abolishment of the additional rate of tax. A complete about-turn now sees the additional rate threshold cut from £150,000 to £125,140. The move will cost someone on £150,000 almost £1,250 a year extra in tax – putting an extra 2% on their total tax bill.
It also comes at a time when wages are rising considerably, creating a pincer movement that will see more people captured in the additional rate tax net.
As a result the government will raise an extra £420 million in tax from higher-paid workers next year, rising to £790 million the year after.
The latest Government figures show there is already expected to be a 50% increase in the number of additional rate taxpayers this year, even before this change was made.
Income Tax – frozen allowances
The Income Tax personal allowance and higher rate threshold will remain at their current levels until 2027/28. The measure will see ‘fiscal drag’ boost Income Tax revenues substantially.
Those with earnings just under the current higher-rate threshold are likely to be hit the hardest. Our estimates indicate someone with earnings of £50,000 today will pay £6,570 more in Income Tax over the entire period of the tax freeze from 2022/23 to 2027/28. Someone on the average UK salary of £33,000 will pay almost £2,600 more Income Tax thanks to the freeze.
State pension triple-lock
The Chancellor confirmed the triple-lock, abandoned for 2022/23, will be reinstated next year.
This means the state pension and pension credit will increase by 10.1%, in line with the CPI inflation measure for September 2022. The decision to raise working age benefits in line with inflation also ensures the Government avoids any accusations of favouring one generation over another.
As a result, the full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.85 per week (£10,600.20 per year) from April 2023. This is something of a milestone as it will be the first time the UK state pension has breached the £10,000 per year mark.
The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase from £141.85 per week to £156.20 per week (£8,122.40 per year).
Although welcomed by millions of retirees, the increase is still below the latest CPI inflation readout of 11.1%. If those price rises persist, even the triple-lock won’t fully protect pensioners’ living standards, highlighting the critical importance of having private wealth from which to generate retirement income alongside the state pension.
Although there were no other major announcements concerning the pension system, the Chancellor did confirm that a review of the state pension age will be filed early next year.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
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