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News & Insights | 18th November 2022
Employee Benefits
3 Min Read
“There are decades when nothing happens; and there are weeks when decades happen,” said Lenin.
Whilst decades might be somewhat of an exaggeration, the events which have unfolded in Westminster since September’s “Growth Plan 2022” announcement have certainly filled much more than their fair share of column inches. We saw the combination of a swathe of tax cuts, combined with a seeming desire to sidestep fiscal oversight from the Office for Budget Responsibility, spook gilt markets and set in motion a chain of events ultimately leading to the implosion of Liz Truss’ premiership.
Two months on, we have a new Prime Minister (in the form of a previous Chancellor), and a new Chancellor facing what are in essence a contradictory set of challenges – to get spiralling inflation back under control without adding further to household borrowing costs, while also providing much needed stimulus to economic growth.
Having abandoned most of the measures set out in September’s Growth Plan, yesterday’s announcements strike a fine line between revenue raising and spending restraint. It would also seem that Mr Hunt has paid much more credence than his predecessor to how his measures will be perceived by voters and global investors alike.
As a result, there have been no explicit increases to rates of personal taxation, with funds instead being raised though the manipulation of the various thresholds and allowances. For example, a reduction in the threshold at which additional rate (45%) income tax becomes payable, to £125,140, had already been widely publicised and will naturally attract the most headlines.
The eagle-eyed among you might have questioned the origin of this oddly specific amount, which ensures that the 45% tax rate will not overlap with the tapered reduction in the personal income tax allowance which applies to annual income above £100,000. Once a person’s income reaches £125,140 p.a. they will no longer benefit from a personal allowance, and the 45% rate will then apply to any income above this level.
In reassuring news for pension savers there was, once again, no mention of any changes to pension contribution allowances, and the related tapering rules. Those who have been brought into the 45% tax band because of the changing threshold should therefore be able to benefit from tax relief on their contributions at the same rate. This may represent a planning opportunity for some.
The “big freeze” which started with the March 2021 budget has been further extended, with the personal allowance, higher rate (40%) tax threshold and the equivalent national insurance thresholds now fixed at their current levels for a further two years until April 2028. As we have touched on in previous commentary, such changes tend to be more insidious than straightforward tax increases because their effects are incremental and hence tend to go unnoticed.
Following numerous reports from the Office for Tax Simplification, Capital Gains Tax (CGT) has had a fiscal target on its back for some time now and reform in this area was therefore not unexpected. Contrary to some predictions, the rates of CGT have remained unchanged in favour of a slashing of the tax-free exemption from the current £12,300 of gain per tax year down to £6,000 in 2023/24 and just £3,000 the following year.
There is a silver lining, in that the reduction in tax-free allowances has not come into effect immediately, thus allowing investors and their advisors time to plan and optimise their situation accordingly. With markets and portfolios still some way off their peak at the beginning of the year, there could be an opportunity for some investors to harvest short-term losses for tax purposes which, as a reminder, can be carried forward indefinitely to set against future gains.
This is, however, a nuanced area of planning and we would therefore encourage you to discuss this with your advisor before taking any action.
In line with capital gains, the dividend tax allowance will also be subject to an incremental reduction to £1,000 in 2023/24 and £500 in 2024/25.
Those looking to buy a property will arguably be much more focussed on upcoming interest rate decisions from the Bank of England than anything coming out of 11 Downing Street, however it was encouraging to note that the increase in stamp duty thresholds announced in September will remain in place until 31st March 2025. By way of recap, the nil rate threshold for stamp duty now stands at £250,000, or £425,000 for first time buyers (subject to a maximum purchase price £625,000).
On a related note, the Chancellor took the opportunity to reaffirm and support the remit of the Bank of England’s monetary policy committee to get inflation under control. In light of both this and this week’s increase in the year-on-year CPI figure to 11.1%, it is safe to predict further base rate increases in the short term.
This intended just as a summary of the main impact of the Autumn Statement on the world of personal finance. Full details of the planned tax and spending reforms can be found on HM Treasury’s website at:
https://www.gov.uk/government/publications/autumn-statement-2022-documents
