Written by Rob Morgan, Chief Investment Analyst at Charles Stanley
Jeremy Hunt, the new Chancellor, will unveil his Autumn Statement tomorrow. He has already cited “difficult decisions” surrounding tax and spending aimed at filling an estimated £50bn fiscal ‘black hole’.
The announcements will build on Mr Hunt’s October statement that was an almost complete reversal of Kwasi Kwarteng’s September ‘mini-budget’. In order to demonstrate fiscal responsibility and to control costly rising debt, the Chancellor will likely focus on boosting tax receipts and cutting spending while highlighting the harsh realities facing the public finances as the economic backdrop deteriorates. However, he has also been warned by economists not to go too far as excessive ‘austerity’ could ended up unduly worsening any downturn.
Already dubbed by some a ‘Frozen Statement’, we will most likely see a range of tax allowances remaining at current levels for longer. This ‘Let it Go’ stance will mean the effect of ‘fiscal drag’ looms large as wage growth, inflation and investment and property gains put more people into higher tax brackets as time goes on. These ‘stealth’ increases are less noticeable but highly effective.
Here is a round up of the probable and possible changes – and the likelihood as we see it:
Income tax – freezing of bands / lowering of 45p ‘additional rate’ band
Income tax thresholds were already frozen until 2026, but the Chancellor looks set to announce an extension to this, perhaps until April 2028. This would pull more people into the income tax system for the first time, or into higher tax bands over the next six years as wages increase. It will underscore the considerable advantages of tax efficient wrappers such as ISAs and pensions as income and investment gains aren’t taxable. It is also possible to invest up to £40,000 a year into a pension and receive tax relief at an individual’s highest rate. Likelihood – 9/10
Additionally, the 45p rate threshold could well be reduced, from £150,000 to £125,000, dragging more people into the highest rate of tax. Likelihood – 8/10
Income tax on dividends – allowance cut
The tax-free allowance for share dividends could be cut from next April. The dividend allowance, which is on top of the income tax personal allowance, was reduced from £5,000 to £2,000 in 2017, and it could fall further or disappear altogether. Dividends provide a regular income from investments and a way for self-employed individuals to pay themselves via their own company. Reducing the allowance will see more of these individuals’ income taxed. An alternative or addition would be to raise the rates on dividends a bit, though they already have been for 2022/23 (to 8.75%, 33.75% and 39.35%) alongside National Insurance rates, and then not reduced when the NIC changes were reversed. Likelihood – 6/10
National Insurance – another tweak
The government has already reversed the 1.25 percentage-point increase in National Insurance contributions (NICs), introduced by Rishi Sunak on 6 November. Might yet another change of stance be on the cards? The accountant’s nightmare, a partial scaling back of the reversal might be a temptation, but Mr Hunt might even expand his horizons and extend NI to rental income. But probably not. Likelihood – 3/10
Capital gains tax – change to tax bands and/or allowance
Capital gains tax (CGT) is paid on the profits from the disposal of assets. There is a CGT annual allowance, presently £12,300, on which an individual pays no tax. However, CGT is payable on profits over that – at 10% or 20% – plus an additional 8% if the gain is from residential property. It would be quite a leap to align rates with that of income tax, as has been mooted, but a more modest rise could be on the cards. More likely, though, is a simple reduction to the allowance. This reinforces the case for utilising ISAs and pensions as far as possible as gains within these are not taxable. Married couples and those in civil partnerships can also transfer assets to each other to make use of two CGT allowances or shift a potential gain to a partner who is in a lower tax band. Likelihood – 7/10
Pensions – freezing of lifetime and annual allowances
The death knell for pension tax relief at marginal income tax rates is traditionally rung before every Budget or fiscal event and, once again we don’t think any change will occur here, tempting though it might be. However, the pension annual allowance and lifetime allowances look like soft targets for the ‘deep freeze’ and could well be set for longer than previously planned in another example of ‘fiscal drag’. The pension lifetime allowance is the amount that investors can accumulate in pension pots during their lifetime without being hit with a penalty when they take money out. The allowance currently stands at £1,073,100. Savings over that limit are taxed at 55% if the money is taken as a lump sum, or at 25% plus your marginal rate of income tax if withdrawn gradually. Meanwhile, the annual allowance refers to the £40,000 limit you can put in a pension each tax year, subject to earnings. There are different rules, and a reduced allowance, for very high earners. Likelihood – 8/10
The big one. The triple lock is the pledge that the state pension will increase each year in line with the higher of inflation, wages or 2.5%. There was a temporary suspension during the pandemic but given that October’s inflation reading is a robust 11.1%, there are fears of a further modification, or that the triple lock could be axed for good. Yet this would likely push people already struggling further into poverty and be politically unpalatable. Likelihood – 2/10
Inheritance tax – freezing of tax thresholds
Inheritance tax (IHT) is charged at 40% of a person’s estate above a tax-free allowance known as the ‘nil-rate band’ – of £325,000. Those with children or grandchildren that leave the family home to them benefit from an additional ‘residence nil-rate band’, which increases the £325,000 allowance to £500,000. This means a couple could leave up to £1m IHT-free to children or grandchildren. Rishi Sunak previously froze the threshold at £325,000 until April 2026 when he was Chancellor, and Mr Hunt could extend this until April 2028. It would mean more people will have to pay IHT as more estates are above the tax threshold these days thanks largely to rising house prices. Likelihood – 9/10