As the dust begins to settle on Jeremy Hunt’s Autumn Statement, you will now be weighing up the potential impact on your finances over the coming years.
Hunt’s package of measures certainly lacked the controversy of those unveiled by his predecessor, Kwasi Kwarteng, in his September mini-Budget. That said, many of you will face higher future tax bills during a period where your finances are already being squeezed.
The decision to reinstate the state pension triple lock was among the more positive measures announced by the Chancellor, with the full state pension set to rise above £200 a week from April. The decision to uprate benefits by 10.1 per cent was equally welcome.
However, it’s worth noting that these increases will likely be absorbed by the rising cost of living, which took a further pounding this week after it was revealed inflation hit 11.1 per cent in October – a 41-year high.
The Office for Budget Responsibility expects inflation to temper to 7.4 per cent next year, but this is still almost four times higher than the Bank of England’s 2 per cent target.
A key factor here is utility bills, which are set to rise again from April 2023 after Hunt announced the energy price cap guarantee is climbing 20 per cent to £3,000 a year for the average household.
The government fulfilled its promise of leaving the headline rates of tax untouched. Instead, as anticipated, stealthy tax grabs proved the Chancellor’s weapon of choice, with threshold freezes to income tax, capital gains tax, inheritance tax and national insurance all extended by two further years to 2028.
The government expects to pocket around £30bn a year by 2026 from these measures, as rising earnings and asset prices will tip more people into higher rates of tax – something referred to as fiscal drag.
Some other reforms, however, were less covert. Due to the lowering of income tax, capital gains tax and dividend tax allowances, many workers, savers, and business owners will pay more tax over the next five years.
Let’s look at these in more detail and offer tips on what you can do to keep HMRC at bay.
Income tax rise
Hunt said that those with the broadest shoulders should carry the greatest burden. This was underscored by his decision to lower the 45 per cent income tax threshold from £150,000 to £125,140.
As a result, roughly 250,000 more workers will pay the UK’s top rate of income tax, with the government set to pocket an extra £1.3bn every year.
It’s worth noting that anyone earning more than £100,000 also loses their personal income tax allowance – which enables you to earn £12,570 a year before paying tax. This freebie, however, is completely lost once annual wages hit £125,140, resulting in an effective rate of income tax of 60 per cent.
What can you do?
One of the most effective ways of easing your income tax liability is paying into a pension, because it reduces your taxable income. For example, if your income is £130,000 and you make a £30,000 pension payment, your net income for the year falls to £100,000.
The benefits here are two-fold: you retain your personal allowance, plus receive 45 per cent income tax relief on £4,860 and 40 per cent on the rest. What’s more, your retirement pot receives a welcome boost.
Capital gains tax allowance cut
Savers and investors breathed a sigh of relief as Hunt opted against raising capital gains tax (CGT). Many feared the current rates of 10 per cent and 20 per cent would be brought in line with income tax rates, which are currently 20 per cent, 40 per cent and 45 per cent.
Alternatively, the Chancellor announced the CGT annual exemption, currently £12,300, will drop to £6,000 from April 2023, and to £3,000 the following year.
If you realise a capital gain - such as selling a house or some shares - above the annual exemption you may pay CGT.
So, if you sold shares with a £10,000 gain in February next year no CGT would be payable. However, in the same scenario exactly two years later, you would be hit with a CGT bill of somewhere between £700 and £1,400.
What can you do?
Firstly, using tax efficient investments becomes even more crucial. With an Individual Savings Account (ISA) any capital gains are free of tax.
For any investments you hold outside of ISAs, you might want to consider using the current year’s CGT exemption before April next year.
A common approach is something called ‘Bed and ISA’ where you sell £12,300 in shares from your investment portfolio and redirect this sum into your ISA. This shelters any future gains from CGT.
Before taking action here, it’s wise to seek advice from a regulated professional, who will ensure that what you’re doing is suitable.
Dividend allowance cut
In a similar vein to CGT, the current dividend allowance of £2,000 will halve to £1,000 from April 2023, then halve again to £500 in April 2024.
The allowance means you pay no tax on dividends below this figure.
Investors will again feel the pinch but aren’t the only group affected here. The reduction is particularly unwelcome for owner/directors of private limited companies whose profits are being hit harder from April due to the top rate of corporation tax rising from 19 per cent to 25 per cent.
Any investors or business owners who receive dividend payments above the allowance will pay tax at either 8.75 per cent, 33.75 per cent or 39.85 per cent.
What can you do?
As with CGT, for investors the key is to make the most of your tax-free allowances – any dividends you receive in ISAs are not subjected to tax.
For those with investments held outside of ISAs, your current investment strategy might benefit from a rethink.
A regulated financial adviser can review what you’re doing now and recommend the most suitable approach to meet your future goals and keep the taxman at bay.
For business owners the situation is slightly trickier, as many use a combination of salary and dividends when drawing profits. On the plus side, you do have flexibility on your side here, and can rejig the mix of salary and dividends to best suit your needs.
Again, getting expert advice could prove the best course of action. A chartered accountant can help to protect your business affairs from what lies ahead.