Another Chancellor, Another Budget
It was with bated breath that we awaited the Autumn Budget Statement by Jeremy Hunt, our UK Chancellor of the Exchequer. The main cause for concern was not only how the Budget Statement would affect each of us, but also how the market would respond. This was crucial, given the extreme turmoil and damage to UK credibility the Mini Budget in September caused, which exacerbated the existing challenges of rapidly rising inflation and interest rates.
However, the good news is that the market response to the announcement was fairly muted, for which we were able to breathe a collective sigh of relief. Another important point to bear in mind is that whilst media headlines run red with news of UK inflation exceeding 11% year on year, there are already early signs in other parts of the world, most notably the US, that inflation may be starting to cool. Although it is still early to determine if inflation in the US has actually peaked, if this is the case, inflation in other parts of the world such as the UK are likely to start easing as well.
Based on these facts, our view is that these current levels of inflation are unlikely to persist over the longer term. It is also important to know that the long term UK rate of inflation over the past 30 years as measured by CPI is currently 2.67% p.a. That said, we cannot get away from the fact that current inflation is impacting everyone now, be it through high food prices, energy prices, or that occasional take out or cup of coffee.
It is with this in mind, we have summarised the main tax changes from the budget announcement which may impact you:
Income Tax
As anticipated, the personal allowance (£12,570) and higher rate threshold (£37,700 above personal allowance) will be frozen for a further 2 years to 2028. Therefore, current basic rate taxpayers (those with income up to £50,270 p.a.) and higher rate taxpayers (those with income up to £125,000 p.a.) will only have to pay more tax if their income between now and 2028 increases.
However, it is still important to note that as a result of the withdrawal of the personal tax allowance on a 2:1 bases on income between £100,000 p.a. and £125,000 p.a. the marginal tax rate on that £25,000 income is up to 60%.
The major change is the additional rate threshold will be reduced from April 2026 to £125,140 (previously £150,000) this has the following impact on high earners:
These changes will apply to taxpayers in England, Wales, and Northern Ireland.
The dividend allowance, which is currently £2,000, sheltering dividend receipts from tax, will be reduced from April 2023 to £1,000. This will fall further to £500 from April 2024.
This will cost savers the following when compared with the current £2,000 allowance:
Capital Gains Tax
As expected, the personal Capital Gains annual exempt amount will reduce from April 2023. Initially the decrease will be £6,000 (tax year 2023/24) falling further to £3,000 in April 2024.
This £6,300 reduction costs taxpayers £630 at basic rate (£1,134 with 8% property surcharge) and £1,260 at higher rate (£1,764 with 8% property surcharge).
The £9,300 reduction from 2024 costs £930 (£1,674 with property surcharge) and £1,860 (£2,604 with property surcharge).
This will affect anyone selling assets for a profit, such as buy to let properties, shares, OEICs and Unit Trusts. It doesn’t affect the sale of your Principal Private Residence.
Pensions
The triple lock – Following weeks of uncertainty the Chancellor confirmed that the basic state pension and the new state pension will increase by inflation (10.1%) next April. The current and new weekly rates are shown below:
Annual Allowance and Lifetime Allowance – Although recent press coverage confirmed that the Government were looking at freezing the lifetime allowance for a further 2 years (to April 2028), there was no mention of it in the Autumn Statement. We believe that the current annual allowance (£40,000) and lifetime allowance (£1,073,100) will remain at their current levels until April 2026, and will keep a watchful eye on the Autumn Finance Bill.
Pensions Tax Relief – There was no mention of fundamental change to pension tax relief. However, because of reducing the additional rate threshold from April 2026 to £125,140 (previously £150,000) pension contributions for those impacted look attractive as a means to mitigate the tax rise. As an example, if someone earned £150k next year and wanting to mitigate the impact of the reduced threshold they could make a gross pension contribution of £24,860 that would gain additional relief (compared to this year) of £1,243.
State Pension Age – The Government is currently reviewing whether the current timetable to increase in the state pension age (legislated to increase over the next 25 years) remains appropriate and will publish its review in early 2023.
Inheritance Tax
The Inheritance tax main bands – Nil-Rate Band (£325,000) and Residence Nil-Rate band (£175,000) will remain frozen until April 2028.
Stamp Duty Land Tax
On 23 September this year the level that stamp duty applies on purchase of a house was increased to £250,000 from £125,000 and in addition there were incentives on offer for first time buyers. The threshold for first time buyers was increased to £425,000 and for the band between £425,000 and £625,000 the SDLT would be 5%. The Chancellor confirmed in the Autumn Statement that this increase will be reclassified as a temporary reduction in the SDLT and will now only remain in place until 31 March 2025.
National Insurance
It is confirmed that National Insurance lower earnings threshold (LEL) and small profits threshold (SPT) will remain fixed until 2023/24.
The Upper Secondary Threshold will stay fixed at £50,270 per annum until April 2028.
Class 2 National Insurance will be set at £3.45 per week and class 3 rate set at £17.45 per week for tax year 2023/24.
ISA Allowances
Remain at current levels – £20,000 ISA, £9,000 Junior ISA
Forward Planning
Given the impact of the above tax changes together with the increase pressure on household budgets, considering ways to invest and withdraw your funds in the most tax efficient way is important more now than ever. As such, please get in touch with us to discuss the options specific to your circumstances in more detail.
by Julian Strauss
Investment Director, Certified Financial Planner
The Cost of Care
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