Following a somewhat chaotic year for the Conservative party, the current Chancellor, Jeremy Hunt, looked to balance the books and future tax increases seemed inevitable. This was confirmed in his Autumn Statement last week.
Now that the chaos has settled, here, we have picked out a few of the salient points from the statement that are here to stay for the foreseeable, and which we feel are most pertinent for effective financial planning over the coming tax years.
With many of the tax-free allowances being reduced from 6 April 2023, it’s important to ensure that these are being maximised by individuals, as well as partners and children, where appropriate. The team here at Gresham will undoubtedly have a busy end to this tax year in striving to utilise our client’s allowances, wherever possible.
The tax-free Personal Allowance has been frozen at £12,570 until 5 April 2028.
The basic rate income tax threshold of £37,700 and the 20% tax rate was unscathed.
The higher rate income tax threshold and tax rate of 40% have both been frozen until 5 April 2028.
From 6 April 2023, the additional rate income threshold will be reduced from £150,000 to £125,140, meaning current higher rate taxpayers will suffer 45% tax on income over £125,140 from next tax year, bringing up to £24,860 more income into the additional rate tax band.
These so-called ‘stealth taxes’ will see more people fall into the various tax brackets over the coming months and years, meaning greater levels of income tax for the majority.
The State Pension Triple Lock
The triple lock was designed to help protect State Pension income by guaranteeing that the income will be fair when compared to those still working. However, there has been a great deal of controversy surrounding the triple lock of late and the government previously announced it would be suspended for the 2022/23 tax year. At that time, national average earnings were rising by over 8%, following the coronavirus pandemic, and so upholding the triple lock would mean that the State Pension increase would need to match this – an unusually high (and costly) amount.
Fast forward to September this year, when the State Pension increase is usually set, and inflation had overtaken average earnings, with CPI at 10.1%. However, following the Autumn statement, the commitment to the triple lock has been upheld which means the State Pension will in fact increase by the highest of the three guarantees – inflation of 10.1% – for 2023/24.
Whilst the triple lock remains in place for now, it is apparent that annual increases of this level are not sustainable in the long run. It may be that other tactics are employed to kick the can down the road – there has already been talk of increasing the minimum pension age further. So, watch this space!
Capital Gains Tax (CGT)
The CGT annual exempt amount is being cut significantly from the current level of £12,300 down to £6,000 in 2023/24 and then again to £3,000 in 2024/25. CGT is payable when a person sells or gifts certain assets, such as antiques, art, second homes and investment funds and shares that are held outside of an ISA, pension, or investment bond wrapper.
The reduction to this allowance may prompt people to consider their investment property decisions.
It also presents the opportunity to fully utilise this tax years CGT allowance by realising gains up to the current exempt amount before 5 April 2023, whilst it is available. A tax efficient way to do so is to move the money into ISAs and/or pensions, where appropriate.
Following the Spring budget earlier this year, the dividend tax rates were increased across the tax bands to 8.75%, 33.75% and 39.35% respectively for 2022/23. Now, in a second strike on dividends, the tax-free dividend allowance is also being cut from its current level of £2,000 to £1,000 in 2023/24 and to £500 in 2024/25.
Furthermore, the additional rate of 39.35% will apply to those with total income above the new lower threshold of £125,140 from 6 April 2023.
The pension annual allowance and lifetime allowance remain unchanged – for now!
Consideration should be given to maximising allowances and tax reliefs each year, not forgetting the carry forward rules for utilising up to the previous three tax years annual allowances, where earnings permit.
Basic rate pension tax relief is added at source and for higher and additional rate taxpayers, further tax relief is reclaimed via the self-assessment tax return.
Given the reduction to the additional rate tax threshold, pension tax relief could be particularly useful for higher and additional rate taxpayers, as personal pension contributions have the effect of extending the basic rate band, meaning more income falls into the lower band, and less income falls into the higher and additional rate bands. If calculated correctly, it can even negate higher and additional rate tax altogether.
Once all the above has been factored in, especially with tax-free allowances being reduced and more tax arising, many more people may now be required to complete self-assessments.
As ever, if you’d like to discuss any of the above points, please contact your adviser in the usual way.