Techcellence: What the Autumn Statement means for you

The reduction in the threshold for the 45% income tax rate to £125,140

Just eight weeks after the announcement that the top rate of income tax would be abolished, Jeremy Hunt has pulled a quarter of a million more people into the top rate which will cost them each £620 on average according to Treasury figures. The 629,000 people already in the higher rate bracket will pay just under £1,250 more in tax.

Impact on take home pay of reduction higher rate tax threshold to £125,140

With the UK government facing pressure on its finances following the pandemic and energy price guarantee, Hunt has cast aside Kwarteng’s theory that you can cut taxes to stimulate growth and instead is prioritising to fill the black hole by a combination of tax increases and stealthy allowance freezes. However, those with higher incomes impacted by this reduction of the 45% threshold are often the people who can afford to plan their tax affairs and are likely to have more than one source of income, therefore it is likely to see an increase in the take up of tax advice.

For clients likely to be pushed into paying the highest rate of tax one common approach is to advise them to save extra money into their pension. It reduces their salary for income tax purposes, and it could bring them back down a tax band. Although this will mean bringing home less money at a time when prices are soaring.

There are other ways they may be able to get themselves back into the 40% tax bracket. For example, through a salary sacrifice scheme, you can give up some of your salary in exchange for a benefit, but this only works if you are not too far over the threshold.

Reduction in the annual exempt amount for capital gains tax (CGT)

Those investing with assets subject to CGT are likely to be disproportionately affected. Instead of a freeze of the £12,300 threshold, this will reduce by more than half to £6000 for 2023/24 and then £3000 for 24/25. For most trusts this will be halved again. For couples, fully using this allowance, a combined tax saving of £4920 is currently available, reducing to £2400 and then £1200. This assumption is for higher/additional rate tax payers with shares and mutual funds, rather than property where there is an additional 8% liability, potentially creating greater concerns for landlords and second-home owners.

For investors sitting on gains, significant thought will be needed regarding the timing of disposals over this and the coming years to maximise the value of the reducing allowance. Looking for any positives, speculation that Private Residence Relief on one’s own home would come to an end was merely that, nor have the rates or CGT been equalized with IT. Carry forward of losses also remains available.

The reduction in the dividend allowance

Elsewhere, Hunt also slashed the dividend allowance from £2,000 to £1,000 from next year and to £500 from April 2024. The dividend allowance was introduced to help savers in 2017. Having initially been at £5,000, it has been frozen at £2,000 for the past five years, however, the £2,000 allowance covered the majority of savers’ dividend income. The Chancellor’s move will mean more people end up paying tax on their dividends and have to fill out a self-assessment form.

For a basic rate taxpayer, the reduction in the dividend allowance to £1,000 will mean they will end up paying £87.50 more in tax. Similarly, if you are a higher rate taxpayer this rises to £337.50 more in tax and £393.50 if you are an additional rate taxpayer.

From April 2024 the allowance halves again to £500 and a basic rate taxpayer will pay £123.75 more, increasing to £506.25 and £590.25 for a higher rate and additional rate taxpayer respectively.

Dividends are a popular way of creating a regular income from investments and therefore reducing the allowance will mean those who rely on dividends for the bulk, or all of their regular income will see this taxed at a much higher level when held outside of a ‘tax wrapper’ such as an Isa or pension.

The advice to clients therefore is to ensure they are making use of all available tax shelters, such as the generous £20,000 Isa allowance. Furthermore, if they are a higher rate taxpayer, it may make sense to plan as a family and transfer shares to a spouse or civil partner who is in a lower tax bracket. You can also make use of children’s Jisa allowance which is set at £9,000 annually.

Reinstating the triple lock

Pensioners suffered a miserly 3.1% increase in the State Pension in April 2022 after the triple lock was scrapped last year following an anomalous rise in earnings and have increasingly struggled to make ends meet as inflation continued to rise and their purchasing power was diminished. The triple lock commitment will see the full new state pension – for those reaching state pension age from 6 April 2016 – rise to £203.85 per week, or £10,600.20 per year as a result of the 10.1% inflation figure seen in September.

While the government has confirmed the triple lock has been reinstated for now, there is still a chance we could come across the same issue next year. The Bank of England has predicted inflation may drop to 7.9% by Q3 next year, so keeping the triple lock in place may prove less expensive from 2024. However, given the turbulence in government decision making we have seen in recent times, we know there are no real guarantees that the triple lock will go untouched for a second year.

The unfreezing of the pension’s lifetime allowance in 2026

Future retirees will be pleased that the government have not announced any plans to continue freezing the lifetime allowance past 2026. Having done so would drag significantly more people into paying the charge each year. It is clear the government was treating pensioners and those about to retire with kid gloves during this budget likely because they see them as the only way to another election win in two years’ time.

It is also worth remembering that one of the groups worst impacted by the lifetime allowance freeze is doctors and the uncomfortable consequence of maintaining LTA at the current level for longer would have also potentially meant there was a knock on effect to NHS too.

While there are few options for limiting the impact of exceeding the LTA there are some things you can do to help mitigate the charge. For example, some individuals may still be able to apply for fixed and individual protection 2016, which protects pension savings from the reduction of the standard lifetime allowance, when it was reduced to £1 million.

All the changes in this budget should be seen as an opportunity for financial advisers to reconnect with clients and make sure that their plans are still fit for fit for purpose.

This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.

This article is based on our current understanding and interpretation of publicly available information and is therefore subject to change. It is intended as general guidance only and is not a definitive analysis of the topics covered. It is not legal, regulatory or financial advice so must not be relied on as such nor as a substitute for taking specific advice tailored to your own individual circumstances.