Impact of the Autumn Statement

With a backdrop of the highest inflation for around 40 years, pressure on Government finances and the markets being spooked by Kwasi Kwarteng’s aborted mini-Budget, the Autumn Statement was always likely to be a relatively cautious and sombre affair.

Jeremy Hunt proposed a series of tax increases and spending cuts to the tune of £55 billion. These will have a fundamental impact on most businesses, and will impact take home pay, as well as how much and where people can save. Wrapped investments such as pensions, ISAs and bonds will come to the fore with dividend and capital gains tax (CGT) allowances being hard hit.

Income Tax

• The personal tax allowance will be frozen at its current level of £12,570 until at least April 2028.
• The higher rate threshold will be frozen at its current level of £50,270 until at least April 2028.
• The threshold for paying the additional rate of 45% income tax is reduced from £150,000 to £125,140 from April 2023, meaning someone earning £150,000 will pay £1,243 extra in tax – approximately £100 per month.

Taken together these changes mean income tax receipts will grow from £225 billion in 2021/22 to £319 billion in 2027/28. And by 2027/28 the annual tax take is forecast to increase by a massive £94 billion a year while real household disposable income is forecast by the OBR to fall by 3.1% in 2022 and a further 3.4% in 2023.

These frozen limits are stealth taxes dragging millions more people into paying income tax for the first time or paying higher rate tax when they were previously basic rate taxpayers. More than half a million people will start paying the additional rate tax of 45%.

Paying pension contributions is a simple way to reduce tax bills, especially for those who start paying higher rate or additional rate tax. The tax system is very complex, with high marginal rates for those earning between approximately £50,000 and £60,000 (who may also lose child benefit while paying higher income tax), and those earning between £100,000 and £125,140 will face an effective rate of 60% on that portion of income due to the loss of the personal allowance, and 45% for those earning more than £125,000.

The effect on dividend and capital gains tax, and why investment bonds might help

From tax year 23/24 the dividend allowance will be reduced from £2,000 to £1,000 and then halved again from tax year 24/25 down to £500 for individuals.

The affect this will have on unwrapped portfolios is demonstrated below if clients have 3% or 4% yielding portfolios:

Currently if a client has a portfolio of £66,000 or less, yielding at 3% then the £2,000 allowance covers this. The reductions announced over the next two tax years means the value would be halved to £33,000 and then £16,500 meaning clients are going to be paying more tax on their dividend income. Given this type of income is applied after non-savings and saving income, this could increase the number of people paying higher rates of tax on this income, especially if combined with additional rates of tax being reduced to £125,140. The effect could be worse if you have a high income portfolio and the yield is at 4% as demonstrated in the table above.

This is bad news for the average investor holding money in unwrapped portfolios outside ISAs and Pensions. There could be an opportunity here for these investors, to take gains in these portfolios and invest into ISAs and pensions but where these contributions have already been maximised, investment bonds provide a real investment opportunity without limiting the investment options.

With the announcement that individual CGT exemptions will reduce from £12,300 to £6,000 from tax year 23/24, and then to £3,000 in 24/25, using an investment bond wrapper could enhance tax efficiency of the money as it is a non-income producing asset.

Those clients who are yet to use their CGT exemptions for this tax year have the next 4 months to utilise this before the changes come in. Where appropriate the spousal exemption for CGT could be used to equalise the assets before selling which means both CGT exemptions could be fully used. These two personal tax changes alone will mean more investors will have to complete self-assessment tax returns on an annual basis.

Widening the IHT trap

The Chancellor announced he was extending the freeze on most personal tax thresholds to tax year 27/28. This included both the standard and residence nil rate band at £325,000 and £175,000 respectively, above which inheritance tax would be payable. The nil rate band has been at £325,000 since 2009. If this had risen in line with inflation, today this would be worth £407,000 and projected forward to tax year 27/28 this would be over £500,000, which is the current combined standard and residence nil rate band.

According to the OBR projections, this would lead to an increase in IHT receipts from £6.1 billion in 2021/22  to £7.8 billion in tax year 2027/28 - an increase of 28%.

This stealth tax increase will mean more people being caught by the IHT trap and having to complete IHT returns and pay IHT on their estates in the near future. The importance of early planning and using trusts so the Treasury is not one of the largest beneficiaries from your estate is so important and trusts give you control over who benefits from your assets.

We should also be mindful that not everyone will receive a residence nil rate band as unlike the standard nil rate band there are certain qualifying criteria, which have to be met. Net estates over £2 million will have this reduced by £1 for every £2 they are over this threshold.

A sting in the tail for pensioners?

The Government confirmed the state pension triple lock will be honoured which means state pensions will be increased in line with inflation from April 2023 - a 10.1% increase.

• The single tier state pension will rise from £9,627.80 a year to approximately £10,600 a year (£203.85 a week)
• The maximum basic state pension, payable to those who reached state pension age before April 2016, will rise from £7,376.20 to approximately £8,121 a year (£156.18 a week)
• The cost of the triple lock is around £9 billion next year
• The Government has confirmed it will publish a review of State Pension Age in early 2023

This will be welcome news to the millions of pensioners struggling with the current cost of living crisis. However, given inflation for pensioners is likely to be higher than the headline 10.1% it may not completely cover the increases people are seeing in their outgoings. And there is also a sting in the tail. With the personal income tax allowance frozen at £12,570 until at least April 2028, if there are future triple lock rises between now and then, the single tier state pension will be very close to the £12,570 figure, potentially dragging millions more pensioners into paying income tax.