Yesterday’s Budget spared savers and investors any further tax rises, beyond those already announced earlier in the year, which we recap below. But with wages rising and inflation ticking higher, the effect of the deep freeze of most personal tax thresholds over the next five years will be all the more taxing. As a proportion of the size of the economy, taxes are headed towards levels not seen since the second world war. Chancellor Rishi Sunak was therefore keen to stress that he really does want to stop raising taxes and start cutting them instead, before the next election.
Seasoned readers of the financial press will know that pre-Budget speculation can often get out of hand. The fear of major changes in the next Budget – and the actions that can lead to – can often be more detrimental to one’s wealth than the actual contents of the Chancellor’s red box itself.
Yesterday, there were no changes to capital gains tax (besides an extension of the deadline for reporting and paying capital gains tax on residential property, where applicable, from 30 days to 60 days). There were no changes to inheritance tax, and no new wealth taxes. The reports of the Office for Tax Simplification and the self-appointed Wealth Tax Commission continue to gather dust on the shelf.
There were also no changes to the taxation of pensions (besides a minor, favourable change related to some workplace pension schemes for those on low earnings, but only from 2024/25 onwards). Likewise, there were no changes to ISAs or any of the other products or investments of relevance to most clients.
Nonetheless, taxes and inflation are rising. Even if both may eventually subside, this makes it all the more important that savings are made to work hard. No savings accounts offer interest rates close to the current rate of inflation, including the recently launched government ‘Green Savings Bond’ that pays an uncompetitive 0.65% per year for 3 years. It is only through investing that long-term returns might be achieved that outstrip inflation and increase your purchasing power. Making the most of the valuable tax allowances available along the way is also all the more important.
The main factors in taxes heading towards record post-war levels, besides extra alcohol duties on the stiff drink some may need at this point, are as follows:
Most personal tax thresholds are to remain frozen at their current levels, in most cases until April 2026 according to current Treasury plans.
As regards income tax, the personal allowance will remain frozen at £12,570 per year and the higher rate threshold at £50,270 per year (for those with a full personal allowance). The personal allowance will continue to be withdrawn for those with incomes above £100,000 per year, and the additional rate threshold remains at £150,000 per year.
For capital gains tax, the annual exempt amount will be fixed at £12,300 per year. For inheritance tax, the nil rate band will remain pegged at £325,000 and the residence nil rate band at £175,000.
For pensions, the standard lifetime allowance is frozen at £1,073,100 and the standard annual allowance limiting pension contributions at £40,000 per year. Lower limits may apply to pension contributions depending on specific circumstances, while some may still be able to use their pension annual allowances from previous tax years.
Meanwhile, adult ISA limits remain £20,000 per year and Junior ISA limits at £9,000 per year.
As incomes and asset values increase – even if only in line with inflation – while the tax bands, allowances and exemptions remain the same, more people will be dragged into paying taxes at higher rates (e.g. at 40% instead of 20%), despite not necessarily being any better off in real terms.
With consumers already experiencing higher than usual inflation (and the Chancellor and Bank of England expecting it to tick higher still in the short term), the extra slice going to the taxman as a result of this so-called ‘fiscal drag’ is not to be underestimated.
The main rate of corporation tax is due to increase from 19% currently to 25% from March 2023. Lower rates will apply to most smaller companies (exceptions apply) as follows:
Source: Saunderson House, gov.uk
The government, reflective of a wider global trend amongst governments, appears to have decided it is easier to tax corporations than to tax individuals directly. We are a long way now from previous Conservative plans to cut corporation tax to 17%.
Nevertheless, the impact of corporate taxation is ultimately borne by individuals. The only question is what share is footed by employees through lower earnings, what share by consumers through higher prices, and what share by shareholders through lower profits.
For banks, the Autumn Budget yesterday confirmed that the bank corporation tax surcharge (levied on top of the main rate) will reduce from 8% to 3% from April 2023. This means that their overall corporation tax bill will only increase from 27% to 28% in April 2023, rather than to 33%.
Despite a pre-election (and therefore pre-Covid) promise not to increase the rates of income tax, national insurance or VAT (a supposed ‘triple tax lock’), Prime Minister Boris Johnson announced that national insurance rates would rise from April 2022, as follows:
Source: Saunderson House, gov.uk
National insurance is only levied on the earned income of those between age 16 and state pension age. It is not levied on income from pensions, property or savings. The ‘higher’ rates are only payable on earned income over £50,270 per year (aligned with the usual higher rate threshold for income tax).
Then, from April 2023, the above 1.25% increase will be split out into a separate tax (a so-called ‘health and social care levy’), with national insurance rates reverting to their current rates. That levy will also be payable on the earnings of those who continue working past state pension age.
For now, the government has steered clear of aligning the rates paid by employees and the self-employed, despite the Chancellor explicitly commenting last year that the Self-Employed Income Support Scheme warranted a greater contribution from the self-employed in the longer run.
That may not remain in the government’s plans, as it would presumably have made political sense to break the promise just on one occasion last month, rather than to announce multiple national insurance rises, drawing further attention each time to the abandonment of the previous promise.
While there is little that many working people can do to reduce their national insurance liability, employees contributing to pensions and with young children should check whether they are making the most of salary sacrifice pension arrangements and childcare tax vouchers through their employers, where available.
More widely, pension contributions and charitable donations can also be useful for those with earnings just above the £50,000 and £100,000 thresholds over which child benefit payments and personal allowance entitlements respectively begin to be tapered away, as it is typically such taxpayers that actually face the highest (unofficial) marginal rates of tax.
Alongside the above increase to national insurance rates, and again despite the promised triple tax lock, the Prime Minister also announced that the rate of income tax payable on dividends would also rise from April 2022, as follows:
Source: Saunderson House, gov.uk
The change to dividend tax rates is mainly targeted at those who run their own businesses and pay themselves using dividends, as such ‘remuneration’ is not subject to national insurance. The change is intended to ensure that they also pay more.
The government insists that it has no means of only specifically targeting such business owners (as opposed to other shareholders), and considers higher dividend taxes affecting a relatively small number of (generally wealthier) people with sizeable investments outside of tax wrappers such as pensions and ISAs to be acceptable collateral damage.
Such investors may take some solace in the fact that the government supposedly being unable to differentiate between such business owners and other shareholders ought to mean that dividend rates will remain below the headline rates for other types of income (20% for basic rate, 40% for higher rate and 45% for additional rate), as the government has to consider the combined impact of both corporation tax and dividend tax on the incentives for those running businesses to incorporate.
Dividend tax rates (and capital gains tax rates too) remaining below those headline rates means that those with investments outside of tax wrappers such as pensions and ISAs can often still achieve a relatively tax-efficient return, especially where they proactively use their annual capital gains tax exemption (£12,300) and dividend allowance (£2,000).
However, the slight increase to dividend tax rates does mean that, in certain cases, the attraction of insurance-based investment bonds (such as offshore bonds) and certain tax-advantaged products (such as Venture Capital Trusts or VCTs) may be slightly greater than in the past.
If you have any questions on the above, and how any items in the Budget or the tax rises announced over the last year may affect you or your financial planning, please contact your usual adviser.
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