Tax bills set to spiral as Chancellor confirms deep freeze on personal taxation – AJ Bell

by | Nov 18, 2022

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Commenting on the Autumn Statement, AJ Bell experts analyse the key announcements from Chancellor Jeremy Hunt concerning income tax and wages, the state pension and pension credit, support with the cost-of-living crisis and energy bills.

Laura Suter, head of personal finance at AJ Bell, comments:

“It’s not yet Christmas, but Scrooge has arrived early. The nation was braced for tax hikes and Jeremy Hunt has certainly delivered on that front. It feels impossible to think that less than two months ago the Government was taking an axe to taxes and handing out financial giveaways to almost everyone. But the new Chancellor was short on generosity and served up a bleak message to the nation.

“In a bid to keep markets on side, the Government had been leakier than a sieve in the run-up to today’s announcement, meaning that there were few surprises. But the only area where Mr Hunt had kept his cards close to his chest was on the replacement for the Energy Price Guarantee come April. The new scheme piles more costs on the average person on the street, but coupled with cost of living payments will help to protect the most vulnerable from soaring energy prices.

  • Energy policy and cost of living support:

“The decision by Jeremy Hunt to curtail the Energy Price Guarantee is a huge blow to households. From April the average annual household bill will rise to £3,000, but the reality is that many households will face far higher costs that this. We’ve seen energy prices increase by 90% over the past year despite the Government intervention, so ratcheting down the support for many households leaves them literally out in the cold. That said, the current prediction is that the average annual energy bill will rise to £3,700 (Cornwall Insights) from April – so the move protects households from a significant chunk of this increase.

“Although heavily trailed, the move to renew cost of living payments for the poorest in society means that many will get vital additional support to help with rising energy bills. The Chancellor has also made it more generous for those on benefits, with a payment of £900 from April (compared to this year’s £650). Pensioners will get the same £300 they got this year, while those on disability benefits will also get the same £150. He has also boosted the Household Support fund by £1bn, giving local councils the power to hand out money to those who need it most in their communities.”

  • Minimum Wage:

“In a rare bit of good news for workers, around 2 million people will get a chunky payrise from next year, as the Government has pledged to boost the minimum wage by 9.7%, taking it from £9.50 to £10.42 an hour. For someone working full time on the minimum wage it will mean a boost of £1,677 a year to their pay.

“The move is intended to ensure the wages of the lowest paid keep up with inflation. In reality, lower paid people face far higher inflation than the average person, as more of their money goes on energy and food costs, which have seen the biggest hikes in price.”

CategoryHourly rate from April 2022Hourly rate from April 2023Annual full-time wage nowAnnual wage from April 2023Difference
Rate for adults aged 23 and over£9.50£10.42£17,290.00£18,967.13£1,677.13
Rate for 21-22 year olds£9.18£10.07£16,707.60£18,328.24£1,620.64
Rate for 18-20 year olds£6.83£7.49£12,430.60£13,636.37£1,205.77
Rate for under 18s and apprentices aged under 19 or in their first year of an apprenticeship£4.81£5.28£8,754.20£9,603.36£849.16
Source: AJ Bell. Figures are based on full time hours of 35 hours a week.
  • Income tax – Additional rate threshold cut:

“Two months ago the wealthiest were celebrating the abolishment of the additional rate of tax, they are now being forced to share in the pain of tax hikes, with the threshold at which that 45% rate kicks in being lowered from £150,000 to £125,140. The move will cost someone on £150,000 almost £1,250 a year extra in tax – putting an extra 2% on their total tax bill.

“The reason the Government plumped for the strange figure of £125,140 rather than just a straight £125,000 is so that the tax threshold aligns with the personal allowance taper, whereby anyone earning more than £100,000 starts to lose their tax-free allowance. By £125,140 the entire personal allowance is lost.

“The move will pile an extra £420m in tax on higher-paid workers next year, rising to £790m the year after. To make this threshold cut at a time when wages are rising considerably means far more people will be captured in the additional rate tax net. The latest Government figures show there is already expected to be a 50% increase in the number of additional rate taxpayers this year, even before this change was made. This will put the rocket boosters under the number caught in the 45% rate.”

SalaryTax nowTax from April 2023DifferencePercentage increase in tax
£150,000£52,460£53,702£1,2432.3%
£145,000£50,460£51,452£9931.9%
£140,000£48,460£49,202£7431.5%
£135,000£46,460£46,952£4931.0%
£130,000£44,460£44,702£2430.5%
Source: AJ Bell.
  • Income tax – Frozen allowances:

“The squeezed middle are pummelled once again as the Government freezes the thresholds at which we all pay tax. Rather than rising with inflation, the point at which you start paying tax, and at which the higher rate tax kicks in, will be stuck at their current levels until 2027/28. At a time of respectable wage growth, millions more people will become higher-rate taxpayers and will see a larger chunk of their earnings hit with basic rate tax.

“Those earning £50,000, and so hovering just under the current higher-rate threshold, will be hit the hardest, paying £6,570 more in income tax over the entire period of the tax freeze from 2022/23 to 2027/28. That represents a 14% increase in their income tax bill over that period. But even those on lower salaries will be paying significantly more tax, with someone on the average UK salary of £33,000 paying almost £2,600 more income tax thanks to the freeze (see table).        

“Not many people chat about ‘fiscal drag’ at the pub or with their tax driver, and the Government will be hoping the nation doesn’t fully recognise the scale of this huge tax hike. Although it avoids breaking a manifesto promise by hiking headline level rate of tax, it will cost individual taxpayers more than a small hike in tax rates and feels like the Chancellor is sneaking into your pay packet to take more of it away for every year the thresholds remain frozen.

“Those hit hardest are people nearing thresholds where they’ll lose benefits. This includes anyone claiming child benefit coming up against the poorly-named ‘high income charge’ that kicks in at £50,000, at which point they see their benefit tapered. Anyone who tips over earning £100,000 a year will face a huge tax hit as they start to lose their personal allowance, while any parents who hit this threshold will also lose their £2,000 a year, per child, tax free childcare.”

Salary at start of 2021/22 tax yearTotal tax due with frozen allowances (from 2022/23 to 2027/28)Total tax due with inflation-linked allowances  (from 2022/23 to 2027/28)Difference
£33,000£27,378£24,821£2,55710%
£50,000£53,265£46,695£6,57014%
£75,000£117,602£104,818£12,78312%

Source: AJ Bell. Median full-time salary is £33,000, based on ONS figures from April 2022. Inflation rate from previous September applied in each tax year, for years 2024/25, 2025/26 and 2026/27 the Bank of England’s latest projections for Q4 in the previous year is used, for the increase applied in 2027/28 the Bank of England inflation target of 2% is used. Wage growth figures taken from March 2022 OBR report, with 2027/28 figures based on average of previous years.

  • State pension triple-lock confirmed

Tom Selby, AJ Bell head of retirement policy says:

“While Jeremy Hunt’s sweeping Autumn Statement tax raid will hit the pockets of millions of people, those who have reached state pension age will have their incomes protected after the Chancellor confirmed the triple-lock, abandoned for 2022/23, will be reinstated next year.

“This means the state pension and pension credit will increase by 10.1%, in line with the CPI inflation measure for September 2022. The decision to raise working age benefits in line with inflation also ensures the Government avoids any accusations of favouring one generation over another.

“As a result, the full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.85 per week (£10,600.20 per year) from April 2023. This is something of a milestone as it will be the first time the UK state pension has breached the £10,000 a year mark.

“The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase from £141.85 per week to £156.20 per week (£8,122.40 per year).

“This bumper income rise will undoubtedly be welcomed by millions of retirees, although it is still below the latest CPI inflation readout of 11.1%. If those price rises persist, even the triple-lock won’t fully protect pensioners’ living standards.

“It’s also worth remembering that not all pensioners will be in receipt of the full state pension. According to the latest official figures, 15% of retirees receive a state pension worth less than £100 a week, with 1-in-5 women taking home a state pension income below this level.”

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