Autumn Statement

There aren't many sequels that improve on the original. Godfather 2, Empire Strikes Back and Paddington 2. That's it.

It wouldn't take much to improve on Kwasi Kwarteng's debut, so how did Jeremy Hunt fare?

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The Autumn Statement no doubt set out to achieve 2 objectives, restore some faith in the Government with the markets and reset public finances with a series of tax rises achieved through cuts and freezes to allowances.

In his first few days in office, he had already reversed most of the measures announced in his predecessor's September Mini Budget. But today he went further by cutting the CGT annual exemption, lowering the additional rate threshold to £125,140 and extending the freezing of other allowances by a further two years.

These measures amplify the need for everyone to make the most of annual tax allowances, and maximising tax efficient savings into pensions and ISAs.

Here are the key points from today's Autumn Statement.

Income tax

Rates - Income tax rates for 2023/24 will remain at the basic, higher and additional rates of 20%, 40% and 45% respectively. The abolition of the additional rate of tax announced in the Mini Budget will not happen.

The Scottish Government intend to hold their own Budget on 15 December, and this will determine the rates which will apply to Scottish taxpayers.

Allowances and thresholds - The point at which additional rate tax becomes payable will be cut from £150,000 to £125,140 from 6 April 2023. This will mean that those already paying tax at 45% will pay an extra £1,243 in 2023/24. The Government forecast that approximately 250,000 individuals will pay some extra tax due to this measure.

The personal allowance and basic rate band remain frozen at £12,570 and £37,700 respectively. This freeze of allowances has been extended by a further two years until April 2028. This means that the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance.

Dividends - The dividend allowance is to be halved from £2,000 to £1,000 for 2023/24, and halved again to £500 for 2024/25. Consequently, many more investors will need to complete tax returns if their dividend income exceeds £1,000 next year. The dividend tax rates for basic rate, higher rate and additional rate taxpayers will remain at 8.75%, 33.75% and 39.35% for both the current tax year and 2023/24. The 1.25% increase installed from the start of 2022/23 will not be reversed.

Comment

As expected, Hunt left the three main tax rates unchanged. The surprise was lowering the £150,000 threshold at which Britons start paying the 45p top rate of income tax to £125,140.

Freezing allowances results in what economist call “fiscal drag”, is likely to affect and hurt more.

At an individual level, if a person is making £51,000 and receives an annual pay rise of 3%, without adjusting personal allowances and thresholds to take account of inflation they will have paid an additional £8,632 in income tax after the six years, with their annual tax bill rising from £8,444 this year to £11,791 in the 2027-28 tax year.

Pensions

There were no changes announced to pension tax relief.

It was also confirmed that the triple lock on the State Pension would be maintained, guaranteeing the 10.1% CPI-based increase for next April along with the same level of increase to the Pension Credit.

Comment

The reduction of the threshold for additional rate tax to £125,140 will see more high earners benefit from relief at 45% on their pension savings. Wage inflation may also mean that a pension contribution is a more attractive option for those who may otherwise lose out on child benefit or personal allowance.

There has been an ongoing review of State Pension age and whether the current timetable for changes is still appropriate. The Government will publish their response in early 2023.

There was no mention of any extension to the freeze to the lifetime allowance which is expected to remain fixed at £1,073,100 until April 2026.

National Insurance

The increase to NI to help pay for social care reforms has been scrapped. The additional 1.25% which was added to the rates of NI for 2022/23 for employees, employers and the self-employed has been removed from November 2022.

NI thresholds will be fixed at the current 2022/23 levels. The changes to the thresholds at which individuals (both employed and self-employed) start to pay NI, which were introduced in July 2022, will remain - i.e. they're kept in line with the annual personal allowance of £12,570.

Comment

In 2021, Boris Johnson’s government decreed that NICs would go up by 1.25p in the pound in April this year to better fund the NHS and social care.

Ministers agreed to push up the main rate of NICs for employees from 12% to 13.25%, while employers were told to pay 15.05%.

However, Liz Truss’s short-lived government scrapped that increase, with the NI rate dropping back to 12% on 6 November.

Most employees will start to receive the cut in this month’s pay, though some workers may have to wait until December or January.

This about-face, combined with the summer decision to increase the threshold at which the tax kicks in (from £9,880 to £12,570 a year), means the average worker’s NIC bill has come down by about £500.

Capital Gains Tax

The chancellor announced that the CGT annual exemption would be cut from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024. Based on 2021/22 figures an estimated extra 235,000 individuals will need to file a self-assessment return in 2023/24 as a consequence.

There was no change to the rates of CGT and these will continue to be 10% and 20% (18% and 28% respectively for gains on residential property).

Comment

This was perhaps the biggest surprise and the one that will affect financial planning advice most.

Capital gains tax is charged on the sale of assets such as shares and second homes. Higher-rate taxpayers pay 20% on profits from shares and securities and 28% on residential property – above an annual tax-free allowance of £12,300.

This annual allowance has increased steadily over the years, it was £6,000 last back in 1995 and is a major change in tax policy.

Hunt's cut means anyone paying the top rate will pay an additional £1,764 of tax and an extra £2,604 the following year.

Inheritance tax

The freeze on both the nil rate band (NRB) and residence nil rate band (RNRB) has been extended for an additional two years. The NRB will remain at £325,000 and the RNRB at £175,000 until April 2028.

Comment

Inheritance tax is paid at 40% on estates worth more than £325,000 for an individual and £650,000 for a couple. This increases by £175,000 each person to a maximum tax-free amount of £1m for a couple if a home is given to children or grandchildren.

This freezing of allowances is particularly significant for families dealing with estates in London and the south-east, where house prices are the highest in the country.

Corporation tax

Corporation tax will rise to 25% from April 2023 as originally planned. However, small companies with profits below £50,000 will continue to pay at the current rate of 19%. There will also be a reintroduction of tapering relief for businesses with profits between £50,000 and £250,000 so that they pay less than the main rate.

Comment

Corporation tax is set to stick to 25% for most of us and will be extended to 28% for banks (for profits above £100m).

It’s rumoured that the Chancellor wanted more (8% more for banks, in fact), the former Chancellor (and now PM) said no, 3% additional was enough not to startle the markets.

From X to Z Comment

There is currently no knee jerk reaction from the markets which is a sign that they don't disapprove of anything too badly.

What is currently without doubt is that everyone will be a little bit worse off as a result of these changes.

The bad news from a planning perspective is the CGT announcements (which were unexpected) and the deep freeze on allowances (particularly IHT, which will see more households brought into that net).

These measures amplify the need for everyone to make the most of annual tax allowances, and maximising tax efficient savings into pensions and ISAs.

Presuming therefore the markets continue with their indifference, we thankfully won't have to suffer a Three-Quel...of which there has only been one success...Back To The Future 3.

Unlike Doc & Marty however, the Tories don't have a time machine to erase the last 2 years, so they will hope this is the start of a turnaround, otherwise we will be taking our cues from Keir Starmer's production studio come election time.