Spring Statement 2022

The Chancellor Rishi Sunak presented his Spring Statement (a.k.a. the mini-Budget) today and the main focus was apparently on measures to help those hardest hit by the rising cost of living

While he continued with his earlier pledge to raise the rate of National Insurance and dividends by 1.25% percentage points to help with social care reforms, he countered some of its impact by raising the threshold at which NI becomes payable.

In a surprise move he announced there will be 1% cut to the basic rate of income tax from April 2024, conveniently timed to kick in for the General Election campaign.

Also from today, a temporary cut will be introduced to duty on petrol and diesel of 5p per litre that will last until March 2023. While this may seem generous, remember when looking at current sky high fuel prices, that before today 57.95p per litre was paid as fuel duty, and 20% VAT is added to the overall fuel bill.

So how do the Spring Statement announcements affect savers. Here are the key points from today’s statement.

Income Tax

• Earnings and savings - In England, Wales and Northern Ireland, the basic rate of income tax will fall from 20% to 19% from April 2024. This will apply to both non-savings and savings income. The trust rate will also reduce to 19% for the first £1,000 of income (the standard rate band). The Scottish Government will decide on the rates in Scotland from 2024.

• Dividends - It was confirmed that the rate of tax for dividends will increase by 1.25 percentage points as part of the measures to fund social care reforms. This will mean the new dividends rates for individuals will be 8.75% (basic), 33.75% (higher) and 39.35% (additional). The rate for trustees will be 39.35% on amounts in excess of the trust’s standard rate band.

• Whilst there is to be an increase in NI thresholds to offset some of the impact of the rate increase to employees, there was no corresponding increase to the dividend allowance to help business owners.

• Allowances and thresholds - The personal allowance and basic rate band will be frozen at £12,570 and £37,700 respectively until 2025/26. This means that the higher rate tax threshold will remain at £50,270 for those entitled to a full personal allowance.

• Scotland - Aside from any changes from 2024, the Scottish Budget confirmed that the Scottish Starter and Basic Rate bands have been increased by inflation whilst all other bands are to remain frozen.

Pensions and Savings

• Pension tax relief – There were no direct changes to pension tax relief in the Chancellor’s Budget which is welcome, as I don’t think there has been a more limiting time for pension savers! However, a reduction in the level of income tax (above) means savers will receive lower tax relief on their pensions. This means that to get the same retirement income, people will have to pay a little bit more into their pensions.

• ISAs - The 2022/23 annual subscription limits for adult and junior ISAs will remain at £20,000 and £9,000 respectively. So, another no change announcement.

Previously announced: Lifetime allowance (LTA) - frozen at £1,073,100. There will be no inflationary increases to the LTA; it will remain at its current level until April 2026. State Pension ‘triple lock’ - In recent years, State Pensions have been uprated each year by the higher of CPI, 2.5% and the average increase in earnings (known as the ‘triple lock’). However, for tax year 2022/23, the earnings element has been suspended. This means that, in 2022/23, State Pensions will increase by 3.1% (the September 2021 CPI figure).

National Insurance

The thresholds at which individuals will start to pay National Insurance (NI) will be brought in line with the annual personal allowance of £12,570. This will happen from July 2022 and applies to both employees and the self-employed and should mean 70% of workers will pay less NI.

From April the self-employed will not have to pay class 2 flat rate NI contributions if their profits are below £9,880, with the lower profits limit rising to £12,570 from July.

The increase to NI to help pay for social care reforms will go ahead as planned. This will see an extra 1.25% added to the rates of NI for 2022/23 for employees, employers and the self-employed. It's intended that the 1.25% rise will become a separate standalone levy from 2023/24.

Capital Gains Tax

No further changes announced.

Previously announced: The annual exempt amount will remain frozen at £12,300 for individuals (and personal representatives) and to £6,150 for trustees of settlements, until 2025/26.

Inheritance tax

No further changes announced.

Previously announced: Both the nil rate band and residence nil rate band will remain fixed at £325,000 and £175,000 respectively until April 2026.

Corporation Tax

No further changes announced.

Previously announced: Corporation tax is set to rise to 25% from April 2023. 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 under £250,000 so that they pay less than the main rate.

Comments

Thankfully only tinkering around the edges and no major overhauls. The Chancellor has to walk a fine line right now between balancing the books and keeping voters happy.

My feeling is the fuel duty cut (despite an overall increase in takings due to the VAT charged on more a expensive total) and promised future income tax cut (even though he just increased it by a larger amount via the NI increase) will satisfy the mob.

From a financial planning perspective, you may want to consider the following when making financial decisions:

National Insurance threshold increase

For SME owners should to take at least £12,570 in salary before considering dividends; paying a working spouse/partner up to the £12,570 threshold. Beyond the threshold though, the salary/dividend comparison remains as it was otherwise. (Although, it will need to be considered again ahead of the basic rate of income tax dropping to 19%).

Basic rate of income tax reduction

Defer a basic rate taxable chargeable event gain from an investment bond, or other basic rate taxable income, until after the rate drops – subject to external other factors of course.

Basic rate taxpayers

Invest in pensions before the income tax rate drops to 19% (getting 1% more front end tax relief)

Defer taking income from a pension (if possible) until after the income tax rate drops to 19%.