What is the impact on income and financial planning?
Faye Church, Senior Financial Planning Director:
In the current economic climate, the Government is looking to close an estimated £53bn gap in the UK’s finances, mainly through a series of increased taxes and changes to tax allowances. Fiscal tightening is now here to stay, and it will affect both earners and savers.
Having had freezes to tax thresholds applied in 2021 through to 2026, Income Tax, National Insurance and Inheritance Tax thresholds will remain constant until at least 2028. The single change to the Income Tax rates is a reduction in the additional rate income tax threshold, which while cleverly labelled as a reduction, is a tax increase for some. This means that in an environment of high inflation, individuals may feel the effects of fiscal drag, with a higher proportion of their income and wealth being taken by tax: inflation could be the largest generator of tax revenue over the next five years.
Businesses and entrepreneurs will also be affected, as corporation tax is still set to increase to 25%. This, coupled with high inflation and a freeze to the VAT threshold until 2026, could be seen as a challenge to growth of small and medium-sized enterprises in difficult times.
It is now crucial that individuals work closely with financial advisers to ensure their assets and income are structured appropriately to help them meet their financial needs.
A freeze on the Income Tax threshold will leave the personal allowance at £12,570 and the basic rate tax band at £37,700 until at least April 2028. A cut in the additional rate threshold from £150,000 to £125,140, will increase the amount of tax paid by those earning above £125,140 from 40% to 45%.
Wage increases lower than inflation mean not only will there be less money to spend, we could also see those increases push more people into a higher tax bracket, eroding the value of each additional pound earned.
The freezing of tax thresholds may also push non tax-payers into the basic rate tax bracket, including some two million more pensioners who will benefit from the state pension triple lock increase this year.
This means financial planning becomes ever more important. Pension contributions can be used to lower income levels, whilst enterprise investment scheme (EIS) and venture capital trust (VCT) investments can provide tax relief to lower a potential income tax bill for those willing and able to accept the associated higher levels of risk. Re-distribution of income-generating assets between spouses may also be an appropriate consideration.
The 1.25% increase in National Insurance and the planned Health and Social Care Levy were both scrapped. This provides some comfort to earners, but funding for these crucial areas will need to be found elsewhere.
Pension contributions via salary sacrifice, can save National Insurance Contributions for both the employer and employee. In some cases the employer will pass on the saving, benefitting the employee even more.
Capital Gains Tax (CGT)
We will see a large reduction of the CGT allowance from £12,300 to £6,000 in April 2023, to £3,000 in 2024. This could fuel the short term selling of assets to take advantage of higher allowances before the end of the tax year. However, care must be taken in times where values may be depressed as we shouldn’t always be led by tax if there is a conflict of objectives.
It is even more important now to make sure you are utilising your CGT allowance each year, especially if you are looking to sell assets at any point in the future. ISAs and pensions are sheltered from CGT and should always be utilised where appropriate.
This will not just affect those looking to sell shares or business assets. Landlords or second home owners will see more of their assets exposed to rates of 28%.
In an environment of high inflation, individuals may feel the effects of fiscal drag, with a higher proportion of their income and wealth being taken by tax: inflation could be the largest generator of tax revenue over the next five years.
Dividend Tax rates will remain the same, but there will be a reduction in the tax-free allowance from £2,000 to £1,000 in 2023 and £500 in 2024.
For business owners who have the flexibility to pay an income via salary or dividends, it may be worth re-assessing whether dividends are the still the most effective way of receiving an income from your business.
For income investors, it may be more attractive to look at corporate and government bonds as a replacement for equity income. With recent moves in interest rates and the cut in dividend allowance, fixed income investments are potentially looking more attractive.
There was no change to the freeze of the Inheritance Tax nil rate band at £325,000 until 5 April 2026. This has been frozen since 2009.
This is a complex area where simplification would be welcomed. The Chancellor has stated “we do not leave our debts to the next generation”, but as this allowance has not increased since 2009, the next generation will continue to be affected.
Cash flow planning allows us to quantify the amount of assets to ring-fence that may be called upon within your lifetime, in turn identifying assets that are surplus to requirements. The benefit being that monies can then be invested outside of your estate or gifted within your lifetime so you can see your family benefit from and enjoy it, rather than pass on via a will.
There was no change to the freeze of the pensions Lifetime Allowance, therefore remaining at £1,073,100 until 5 April 2026. Making regular pension contributions and steady investment returns may mean you breach the Lifetime Allowance before you retire. By taking advice early, we can assess how best to accumulate assets for retirement in the most tax-efficient way, potentially utilising other allowances and alternative ways of investing where necessary.
Corporation Tax will not be cut as was previously proposed. Instead, it will increase from 19% to 25% from 1 April 2023.
What was the impact on investment markets?
John Wyn-Evans, Head of Investment Strategy:
Such is the relationship between fiscal decision-making and the reaction of markets these days that finance ministers are loathe to spring nasty surprises on financial markets when announcing their budgets. No doubt Kwasi Kwarteng’s ill-fated “mini” budget was an exception that proved the rule, but, if anything, that only served to increase the need for a “safety first” approach. Thus, the government carefully laid a trail of breadcrumbs in the weeks leading up to the latest announcement, meaning that investors were already well fed with information about higher taxes and reduced spending.
The background to the Autumn Statement was hardly uplifting. The previous week’s GDP data showed that the UK economy shrank during the third quarter, and subsequent inflation data revealed consumer prices to be rising at their fastest pace since the early 1980s. But it says something about the level of investors’ expectations that both the pound and the Gilts market took both sets of data in their stride. It is these two financial barometers that are most closely watched as indicators of confidence in the stewardship of the economy.
The Chancellor’s opening words were to acknowledge the efforts of the Office of Budget Responsibility (OBR) and to outline its forecasts. We were not especially surprised to hear that the OBR believes that the UK is already in recession, but there was a stark reminder that the worst of its effects are yet to be fully felt. Whereas the unemployment rate today remains near the low point of the cycle at 3.6%, it is forecast to rise to 4.9%. We have often observed in the past that the fortunes of the housing market are highly dependent upon the interaction of employment and interest rates. With the Bank of England set to continue raising rates and unemployment rising, there will be little respite for the housing market for the foreseeable future, although previously introduced Stamp Duty cuts will remain in place until 2025.
The Chancellor announced a fiscal consolidation of £55bn, with slightly more than half of the measures coming from spending cuts and a little less than half from increased taxes. From an investor’s perspective, the main news concerned a reduction in the dividend allowance from £2,000 to only £500 over the next two years. Expectations had been for a cut to £1,000. More surprising was a drastic cut to the Capital Gains Tax allowance. This currently stands at £12,300 but will fall to £6,000 next year and to £3,000 in April 2024. We had been fearful in the past that these sorts of measures would be enacted by a Labour Government under Jeremy Corbyn. The fact that they are being proposed by a Conservative government only serves to emphasise the size of the hole that needs to be filled.
As expected, windfall beneficiaries of higher energy prices were subjected to a levy on excess profits, despite intense lobbying from the energy industry. We are not surprised by this.
From an investor’s perspective, the main news concerned a reduction in the dividend allowance from £2,000 to only £500 over the next two years. Expectations had been for a cut to £1,000. More surprising was a drastic [more than 50%] cut to the Capital Gains Tax allowance [next year].
In terms of the cost savings side of the equation, there were no great surprises either. In fact, there is some fiscal easing in the next two years (conveniently ahead of an election) with the cuts back-end loaded. This might exert some pressure on the Bank of England to keep raising interest rates in the short term. Any thoughts of abandoning the pensions “triple lock” were kicked firmly into touch, and the cost of funding these increases was put at a hefty £11bn.
Indeed, the Chancellor did his best to deflect attention away from specific cuts by focusing on the outlook for the government’s growth priorities, which cover energy independence, infrastructure and innovation. To support these aspirations, he announced the relaxation of Solvency II regulations which will free up more capital from the insurance industry for investment purposes.
One little, yet important, detail was that the Debt Management Office (using the OBR’s forecasts) reduced its expectation for gilts sales this fiscal year from £194bn at the time of the “mini” Budget to £169.5bn. A survey of bond-trading banks undertaken by Reuters had suggested a figure of £185bn.
All in all, this was a confidently delivered Autumn Statement, one that had been well tested beforehand and one which consequently held little by way of surprise. The 10-year Gilt yield rose back to its highest levels of the day (3.22%, with a low during the speech of 3.14%), but this is against a background of similar rises in bond yields in other countries and so would not appear to reveal any specific dissatisfaction on the part of investors. The pound was a touch lower against the euro and the dollar, but well within the treading range of the last three days. Indeed, it might have been due a pause after a strong bounce from recent lows.
We note a small rise in the shares of UK banks as the bank tax surcharge is cut from 8% to 3% but remember that the overall tax level will remain the same because corporation tax is set to rise again. The threshold for paying the levy was increased from £25m to £100m.
The equity market overall is following other indices around the world lower, suggesting that investors saw nothing in this statement to change their existing views relative to other markets. That will have been exactly what the Chancellor and the Prime Minister would have wanted, given that they had no real capacity to spring a positive surprise. But let us not forget that the next few months, if not longer, will continue to be a very tough period for the UK economy.
The information contained in this publication does not constitute a personal recommendation and the services referred to may not be suitable for all investors. The value of investments can fall as well as rise and you may get back less than you invested. All statements concerning tax treatment are based upon our understanding of current tax law and HMRC practise and can be subject to change. Any tax benefits depend on your individual circumstances.