As was widely expected, yesterday in his Autumn statement, Chancellor Jeremy Hunt detailed a range of measures consisting of both tax increases and spending reductions aimed at reducing the ‘£50bn hole’ in the UK’s finances. Although the majority of spending plans were pushed back until after the next election there were a number of tax changes that will directly impact investors.
One of the Chancellor’s main aims would have been to avoid the sort of market turmoil that we saw following the previous mini budget in September. From the point of view of markets, the most important thing was that the statement contained no surprises and had been scrutinised by the Office for Budget Responsibility (OBR). Overall, this aim was achieved with the market showing a muted reaction. However, the OBR forecasts made grim reading and highlighted that the economic conditions in the UK are going to remain difficult for some time.
The OBR announced that the UK entered recession in Q3 2022 with the economy expected to shrink by 2% before returning to growth in 2024. It expects inflation to peak at 11.1% in the last quarter of 2022 (a 41 year high) before falling back to 3.8% by the end of 2023 and finally below the Bank of England’s 2% target by the end of 2024. This will ultimately effect households’ disposable income which is expected to fall by 7% over the next two years, representing the largest drop in living standards since records began in 1956. The Chancellor will be hoping that the measures he announced will result in a shallower economic downturn.
One bright spot was the support for pensioners who will see their state pensions increase in line with inflation as the ‘triple lock’ was honoured. Benefits will also increase with inflation to support those on the lowest incomes. However, this was coupled with a raft of tax increases and a freeze on most government budgets (a reduction in real terms due to inflation) until 2025 and then smaller increases than originally planned going forward.
The range of policies covered in the statement was vast but below we take a closer look at some of the more important changes for investors.
Income tax
For individuals the most notable and headline grabbing changes were to income tax.
In a complete u-turn from the mini budget, the additional 45% rate of tax has not only been retained but the threshold for when it becomes payable has been reduced from £150,000 to £125,140. This means that the UK has gone from having potentially zero 45% taxpayers to more than 200,000 extra additional rate taxpayers in the space of 8 weeks. To put that into context an individual earning £150,000 a year next year will pay an additional £1,240 in income tax.
For lower earners, while the rate of tax has not increased, the personal allowance (on which no income tax is paid) has been frozen at £12,570 for an additional two years, until April 2028. Historically this allowance has increased with inflation. In reality this ‘fiscal drag’ means that over time pay rises will result in individuals paying more tax than they would have otherwise and could even push people into higher tax bands.
Non-earned income has also been impacted with the annual dividend allowance being reduced from £2,000 to £1,000 from April 2023 and then again to £500 from April 2024. The allowance was first introduced in 2017 to help savers, it started at £5,000 but had been frozen at £2,000 for the past five years. It means that savers with shares in non-tax wrapped portfolios are more likely to pay income tax on any dividends received. The importance of utilising your ISA allowance has just increased!
Capital gains tax
In 2020, in his role as Chancellor, Rishi Sunak commission a review of capital gains tax (CGT) from the Office of Tax Simplification. At the time no material changes to the CGT regime occurred but yesterday what had long been expected finally happened. The annual CGT exemption, (the amount of gains that can be realised before tax is payable), will be reduced in April 2023 from the current amount of £12,300 to £6,000 and again to just £3,000 in April 2024. That means that a £60,000 non-tax wrapped portfolio only needs from see 5% growth from 2024 before the capital within it becomes potentially liable to CGT if sold.
Investors are going to have to carefully consider their position and if they do have large capital gains within their portfolios, they would be well suited to considering a strategy for crystallising assets where there are opportunities to make the most of the current exemption. Although the rates of tax payable have not changed, if a higher rate taxpayer sells assets that have increased in value by £100,000 since they were invested, then after April 2024 they will pay an additional £1,860 in capital gains tax.
Inheritance tax
In much the same way as income tax, the rate of tax payable on estates was left unchanged. However, the current nil rate band of £325,000 and the £175,000 residential nil rate band, which have been frozen since 2009, will also have that freeze extended to April 2028. If an individual’s estate is valued over these thresholds, they will then have to pay 40% inheritance tax on everything above. It means that individuals with estates that are likely to grow in value over time are likely to incur more tax upon death, making it even more important for people to ensure that they have engaged proactively in estate planning.
Other notable changes
Windfall tax on energy producers – the tax on the unexpected profits of oil and gas producers will be increased from 25% to 35% and will be extended through to March 2028.
Support for energy bills – from April 2023 the price guarantee will be extended for a year but reduced by £500, meaning the average household will now pay £3,000 per year for gas and electric rather than £2,500.
NHS and school spending – in a rare bit of good news the NHS budget in England will increase by just over £3bn per year in each of the next two years. School funding will also increase by £2.3bn per year over the same period.
Stamp duty – in September 2022 that nil-rate threshold of Stamp Duty Land Tax (SDLT) was increased from £125,000 to £250,000 for all purchasers of residential property and from £300,000 to £425,000 for first time buyers (up to property values of £625,000). These thresholds have been left unchanged, but they will now be temporary, remaining in place until 31 March 2025.
Vehicle Excise Duty (VED) – from April 2025 electric cars, vans and motorcycles will begin to pay VED in the same way as petrol and diesel vehicles.
Who will be affected by these changes?
If you fall into one or more of the categories below, you should speak to your portfolio manager, tax specialist and/or your financial planner to ensure you make the most of current tax rules while you can:
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If you have capital gains within your investment portfolio – especially if you are a higher-rate or additional-rate taxpayer, or you are on the threshold of moving up a tax bracket.
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If you are a property investor.
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If you are planning to leave your estate for future generations to enjoy.
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If you are a business owner who is planning to sell their business in the future.
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Trustees with unwrapped portfolios within their trusts.
What should you do now?
It is important to always seek professional tax and financial advice before making any changes to your investments. Your adviser may recommend that you:
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Ensure you are taking advantage of the tax allowances and exemptions you have relating to income, capital gains and inheritance tax as well as maximising contributions to tax efficient savings vehicles such as ISAs, pensions and investment bonds.
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Reinvest some of your funds, thus crystallising the gain and effectively starting from zero again.
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Transfer assets to a spouse or civil partner in a lower tax bracket or one who hasn’t used their allowances/exemptions.
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If you own an investment property and you think you might need the money soon, speak to your adviser who can talk you through options to minimise CGT such as equity release or an early sale.
If you have any questions about the Autumn Statement and how it might affect you, please speak to your atomos portfolio manager or financial planner.