Against the backdrop of a looming recession and in the aftermath of the failed “mini-Budget”, the chancellor recently delivered his autumn statement.
While Jeremy Hunt was careful not to raise the baseline levels of tax, several measures in the statement will likely see you pay more tax over the coming few years.
These so-called “stealth taxes” sometimes fly under the radar, so here are five of the ways the measures the chancellor announced could affect you and your finances.
1. Freezing of Income Tax thresholds, and paying additional-rate tax earlier
In 2021, the then-chancellor, Rishi Sunak, froze the Personal Allowance – the amount you can typically earn before you begin paying Income Tax – at £12,570 to 2026.
He also froze the threshold at which higher-rate tax is payable, at £50,270.
In the autumn statement, Jeremy Hunt announced an extension to these freezes until 2028.
As wages increase, you will likely pay more tax then if these allowances were uprated with inflation. It may also see you dragged into paying 40% tax or result in you paying higher-rate tax on more of your earnings than you would if the allowances rose in line with the cost of living.
Analysis in the Telegraph suggests that the freeze, combined with soaring inflation, will drag 4.2 million workers into the 40% tax bracket.
Additionally, in a spectacular U-turn from his predecessor who intended to abolish the 45p rate of Income Tax, the chancellor reduced the threshold at which you start paying the additional rate from £150,000 to £125,140.
Consequently, if you earn more than £150,000 a year, you’ll pay around £1,240 more Income Tax each year.
2. Reduction in the Capital Gains Tax annual exempt amount
In the 2022/23 tax year, you can make gains of up to £12,300 on the disposal of assets such as non-ISA investments, or property that is not your main residence, before Capital Gains Tax (CGT) is due.
From April 2023, the CGT annual exempt amount will reduce to £6,000 for individuals and £3,000 for most trustees. From April 2024, the annual exempt amount will be permanently fixed at £3,000 for individuals and personal representatives, and £1,500 for most trustees.
This measure means that you will likely pay more tax on your gains than before.
The reduction in the annual exempt amount means more careful planning will be needed, particularly concerning areas such as maximising your ISA investment.
3. Freezing of Inheritance Tax nil-rate bands
Inheritance Tax (IHT) receipts are on the rise. According to HMRC, estates paid £4.1 billion in IHT between April 2022 to October 2022, up £0.5 billion when compared to the same period a year earlier.
In the autumn statement, Jeremy Hunt froze the IHT nil-rate band of £325,000, and residence nil-rate band of £175,000 – the thresholds at which IHT normally becomes due – until 2028.
If you plan to leave your home to a child or grandchild, and the total value of your estate (including the property) exceeds £500,000, your loved ones could face a 40% IHT bill on your death.
As house prices and asset values rise, more and more families are likely to be dragged into paying the tax. This is particularly significant for families in London and the south-east where house prices are the highest in the country.
Working with a financial planner to create an estate plan, and making the most of trusts and gifting allowances, could become increasingly important if you want to ensure your family benefit from the full value of your estate.
4. Reduction in Dividend Allowance
In another reduction in tax allowances, the chancellor announced that the tax-free allowance for dividend income (the Dividend Allowance) will reduce from £2,000 to £1,000 from 6 April 2023 and then to £500 from 6 April 2024.
If you receive any dividend income – from shares or if you draw income from your business as dividends – you may pay more tax from April 2023.
As this allowance reduces in April 2023 it could pay for you to make the most of the allowance at its higher level before the end of the 2022/23 tax year.
5. Freezing of pension Annual and Lifetime Allowances
In a further freeze, Jeremy Hunt froze the amount you can contribute tax-efficiently to your pension each year, and over your lifetime, until 2028.
- The Annual Allowance will remain at £40,000, or 100% of your earnings if lower
- The Lifetime Allowance (LTA) will remain at £1,073,100.
While you may think that accumulating a £1 million plus pension pot is unlikely to affect you, over the course of decades of your working life, and thanks to rising asset values, it’s increasingly likely this issue could affect you.
Citywire research suggests that freezing the LTA for pension contributions at its current level will cost individual savers nearly £65,000 in tax-free cash as inflation rises. This is compared to the amount of tax-free cash you could take if the LTA was increased by inflation between now and 2028.
If you exceed the LTA, any lump sum you then draw from your pension could be subject to a tax charge of up to 55%. Drawing income above the LTA could see you face an additional 25% tax charge.
Tackling LTA issues can be complex, so it can pay to seek advice on how to maximise the tax efficiency of your retirement savings.
Get in touch
If you want to make the most of the available tax allowances, and you want to ensure you don’t pay more tax then you need to, we can help.
To discuss any aspect of the autumn statement and what it means for you, please email us at firstname.lastname@example.org or call 020 3828 8100 today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.