Faced with a cost-of-living crisis, Chancellor Rishi Sunak included in the latest Spring Statement a few headline-grabbing tax cuts: lowering fuel duty for 12 months, increasing the amount you can earn before paying National Insurance, and promising an eventual income tax cut in 2024. Otherwise, however, there was little within the Spring Statement of relevance to the financial planning of most clients, who should still expect higher taxes and higher prices over the years ahead.
The Chancellor has announced a £3,000 increase in the main threshold from which National Insurance becomes payable, to align this with the personal allowance for income tax. From this July (for employees) and from April 2023 (for the self-employed), the first £12,570 of earnings will be tax-free, fulfilling a Conservative manifesto promise to achieve that in this Parliament.
However, the government is still going ahead with the increases to National Insurance rates announced last year, which will come into effect next month. These increase the headline rates of National Insurance by 1.25 percentage points from 12% to 13.25% (for employees), from 9% to 10.25% (for the self-employed) and from 13.8% to 15.05% (for employers).
Taken together, these changes mean that employees earning less than £41,389 will pay less National Insurance than currently, but those earning more will pay more. However, there will be little respite for employers, as no corresponding increase is being made to the threshold for employer contributions, so the full brunt of the 1.25 percentage point increase will be borne by most employers across their staff.
It is worth remembering that only individuals between age 16 and state pension age pay National Insurance, and only then on their earnings. These changes therefore increase the difference in the taxation of those either side of state pension age, as well as the difference between the treatment of earned income and most other income, such as pension income, property rental income and the interest from cash and bonds.
In an unusual move, the Chancellor announced a future income tax cut more than two years ahead of time. From April 2024, he has promised to reduce the basic rate of income tax from 20% to 19%. Normally Chancellors prefer to pull such rabbits out of the hat with little notice, for greater dramatic effect. Here instead Rishi Sunak seems to have calculated either that he had to announce ‘doing something’ now or that there’s greater political expediency in spending the next two years talking about this forthcoming measure. Either way, bearing in mind how much things have changed in the last two years, he will have to hope that he is not a hostage to ‘events, dear boy, events’ over the next two.
As ever, when faced with the prospect of a future tax cut, if individuals have control over the timing, it may be worth deferring taxable income until after the cut comes into effect: an example might be the surrender of an offshore bond. Conversely, it may be worth bringing forwards actions that qualify for income tax relief, such as pension contributions or charitable donations. That said, as the tax cut will only apply to the basic rate band (with higher and additional rates staying the same) and is relatively modest in its proportion, this may not make a material difference.
Finally, it is worth remembering that income tax on dividends will be going up next month, by 1.25 percentage points in line with the National Insurance rise. Dividend taxes will rise from 7.5% to 8.75% for basic rate taxpayers, 32.5% to 33.75% for higher rate taxpayers and 38.1% to 39.35% for additional rate taxpayers. Directors of companies with the power to declare dividends may wish to do so promptly to spare their shareholders a little extra tax.
The Spring Statement contained no new announcements relating to Capital Gains Tax (CGT), Inheritance Tax (IHT) or stamp duties, nor of any other new ‘wealth’ taxes. There were also no changes to pensions, ISAs or offshore bonds, the mainstream tax wrappers within which investments can be sheltered from CGT and dividend taxes. Pension and ISA allowances all will remain the same next tax year as this.
Tucked away inside the statement, however, was a reference to ‘over 1,000 tax reliefs and allowances’ that the government will look to reform ahead of 2024, so we await further details of those in due course.
Despite the headline-grabbing tax cuts, taxes are still going up, and the government now expects to receive more overall in tax over the coming years (even after these ‘tax cuts’) than it did even as recently as last October. As ever, giving with one hand, the Chancellor takes with the other, as he looks to rebuild the public finances post-pandemic.
The main driver of this is that personal tax allowances are to remain frozen across the board until April 2026 (the National Insurance threshold rise aside). This has a huge effect with inflation now running at 6.2% and only expected to go even higher later this year before it eases.
In 2025/26, the Office for Budget Responsibility now expects there to be an extra 2.7 million basic rate taxpayers (who otherwise wouldn’t have paid any income tax) and an extra 2 million higher rate taxpayers (who otherwise would have only paid basic rate), versus its projections just a year ago.
And amongst those higher rate taxpayers, many more may fall into the clutches of some of the more pernicious features of the tax system, such as the tapering away of child benefit where incomes are over £50,000 and of the personal allowance over £100,000, though both of those traps may be avoidable with careful planning.
Pressing ahead with the National Insurance rate rise, the dividend tax increase and the April 2023 hike in the main rate of Corporation Tax from 19% to 25% will raise further significant sums for the Exchequer, as will recently announced changes to how future graduates (starting at university from September 2023) will repay their student loans.
In a world of both higher taxes and higher prices, having a financial plan and a sound investment strategy and sticking to both are key, and these remain at the heart of our service to clients. If you have any questions, please do not hesitate to get in touch with your Saunderson House adviser or contact us on the general way.
This note is for general guidance only and does not constitute, and should not be construed as, investment advice or a recommendation to engage in investment activity. It represents our current understanding of law and HM Revenue and Customs practice as at 25th March 2022. We cannot assume legal liability for any errors or omissions and detailed advice should be taken before entering any investment activity. For further information, please contact your usual Adviser.
Saunderson House, a wholly-owned subsidiary of Rathbones Group Plc, is authorised and regulated by the Financial Conduct Authority.
OBR reference: https://obr.uk/download/economic-and-fiscal-outlook-march-2022/ p108
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