Big tax rises are expected to be announced in this week’s Autumn Statement. Under Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt, the previous administration’s focus on tax cuts as a way to trigger economic growth has been replaced by a seeming determination to restore the UK’s financial credibility and plug a £50bn fiscal black hole in the nation’s finances.
It is against this unpromising backdrop and persistent indications that the measures will target those with the broadest shoulders that Thursday’s forthcoming statement to be delivered by Chancellor of the Exchequer Jeremy Hunt should be seen.
What to look out for?
While cuts to government spending of at least £35bn are anticipated, it’s expected that a lot of the heavy lifting to repair the public finances will be undertaken by raising taxes. Tax rises of up to £25bn a year are on the cards. As covered in our recent article, It’s widely expected that Rishi Sunak’s decision back in 2021 to freeze many tax band thresholds and allowances until April 2026, allowing inflation to pull more and more people into higher tax brackets or into paying tax for the first time – so called stealth taxes, will be confirmed by Jeremy Hunt. But don’t be surprised if as persistently rumoured some or all of these measures are extended for a further two years until April 2028. All told, holding income tax allowances and tax thresholds at current levels until 2028 would raise an additional £36bn a year by then.
Capital Gains Tax (CGT)
Despite CGT receipts reaching a record £14.3bn in the 2020-21 tax year, it’s rumoured that the Chancellor is considering making changes. The options available to the government are freezing or even cutting the annual tax-free allowance, and/or raising the rates of CGT.
In a report published in November 2020, the Office of Tax Simplification recommended that the rates of CGT and income tax should be “more closely aligned”. It also recommended that the government consider reducing “the relatively high” £12,300 allowance. At the time these recommendations were rejected by the government, but now it appears they are firmly back on the table.
CGT can be charged on any profit on an asset above the £12,300 annual tax-free allowance when the owner comes to sell it. The CGT is calculated by adding the gain to a person’s income and then taxing it. The current CGT rates are 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. For transactions involving residential property the respective rates are 18% and 28%. A tax relief known as principal private residence relief means that CGT is not payable on gains made on the sale of a person’s main home. If CGT tax rates were aligned with income tax rates, basic rate taxpayers would be charged 20%, while higher rate taxpayers would pay 40% tax and additional rate taxpayers would pay 45%.
Another change reported to be under active consideration is a rise in the dividend tax rate. At present the rate varies in line with income tax bands, as follows; basic rate 8.75%, higher rate 33.75% and additional rate 39.35%. It’s believed that a 1.25 percentage point rise is one option being contemplated, which would take rates to 10%, 35% and 40.6%. It’s also possible that the tax-free dividend allowance, currently £2,000 could be halved to £1,000. Dividend tax is not payable on shares held within stocks and shares ISAs (Individual Savings Accounts). As recently as April 2016, the dividend allowance was £5,000.
Inheritance Tax (IHT)
In the first half of 2022, a record £3.5bn was paid in IHT, up from £3.1bn for the same period in the previous year.
It’s been widely reported that the Chancellor will extend the freeze on the nil rate band and the residence nil rate band, which currently stand at £325,000 and £175,000 respectively.
The nil rate band has been frozen since 2009, which means that rising house prices have seriously reduced its value, dragging more and more people into paying IHT. If reports that these bands are to remain at their current levels, this trend will continue.
Inheritance tax of 40% is applied on estates worth more than £325,000. The additional nil rate band allows single people to pass on an extra £175,000 free of tax if they are a homeowner and are passing wealth on to their children. Any unused nil rate band or residence nil rate band can be passed on to your spouse or partner. This means that a married couple or people in a civil partnership, who are homeowners could leave £1m free of inheritance tax to their children.
A reduction in the seven-year gifting rule to five years, which was recommended by the OTS in a report published in July 2019 is considered less likely. This rule means that gifts you make to an individual will only be tax-free if you survive at least seven years.
It’s likely that most personal allowance and the tax band thresholds will remain at their current levels. However, the idea of lowering the threshold above which people pay the 45% additional rate of income tax from its current £150,000 to perhaps £125,000 is believed to be a serious possibility.
Lifetime Allowance (LTA)
If reports are to be believed, the current £1,073,100 lifetime allowance (LTA), the maximum a person can build up in pension savings before they become liable for a tax charge is set to be extended until April 2028. Pension savings over this limit are taxed at 55% if taken as a lump sum, or at 25% if taken as income. Click here to read our detailed analysis of the effects of freezing the lifetime allowance.
The state pension
While taxes look certain to rise, there’s likely to be some good news for those in receipt of the state pension, with strong indications that the government will honour its promise to retain the triple lock. This guarantees that the state pension is indexed to whichever of the following figures is highest; earnings growth, 2.5%, or the previous September’s inflation rate. With this September’s inflation rate standing at 10.1%, this would take the new state pension – where the state pension age was reached after 05/04/16, to more than £10,600 from April 2023. However, this would be offset by any freezing of the current £12,570 personal tax allowance, which would result in more pensioners paying tax.
Nobody knows what exactly will be in Jeremy Hunt’s Autumn statement when he stands up in the House of Commons. But even if only some of the measures reported as being part of his plans are introduced, it will have important implications for people’s finances and wealth up and down the land.
Look out for our coverage on the day of the Autumn Statement itself and our information pack containing all the key points. This will be available on the Courtiers website with an update emailed to clients once available. Should you wish to discuss the Autumn Statement in more detail and to understand what it means for you and your family, or if you have a question, please contact your Courtiers Adviser, or get in touch via our website.