Recently, UK Chancellor Jeremy Hunt delivered his 2022 Autumn Statement, in which he set detailed plans to increase taxes and reduce spending to narrow the gap between the government’s income and outgoings.
This Autumn Statement reassured the markets by demonstrating fiscal responsibility and was accompanied by growth forecasts from the Office for Budget Responsibility (OBR).
The raft of tax hikes included slashing the capital gains tax (CGT) exemption, dividend allowance and additional-rate income tax threshold, and extending the freeze on the personal allowance, higher-rate income tax threshold and inheritance tax (IHT) nil-rate band. Also, Hunt announced that public spending would rise by just 1% yearly in real terms in the next parliament. The energy price cap will increase from April 2023, meaning the average household will see their bills rise from £2,500 to £3,000 a year.
Following are highlights of the key announcements:
Capital Gains Tax
What has changed? The Chancellor announced that the annual CGT exemption will be slashed from £12,300 in the current tax year to £6,000 in 2023/24 and £3,000 in 2024/25. Any profits (‘gains’) that exceed the exemption will be taxed at the existing rates of 20% for higher and additional rate taxpayers and 10% for some basic-rate taxpayers (28% or 18% on gains from the residential property).
What has changed? The annual dividend allowance – the dividend income you do not have to pay tax on – will fall from £2,000 in the current tax year to £1,000 in 2023/24 and £500 in 2024/25. The dividend tax rate will remain at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers.
Income Tax Thresholds
What has changed? The additional-rate income tax threshold will be lowered from £150,000 to £125,140 from April 2023. The personal allowance (the amount you can earn each year before you start paying income tax) and the higher-rate income tax threshold have been frozen at their 2021/22 levels of £12,570 and £50,270, respectively, for an additional two years until 2028.
Lowering the additional-rate income tax threshold will result in more people paying the 45% top rate of income tax. Someone earning £150,000 could face an income tax bill of £53,703 in 2023/24, up from the current £52,460. An individual who earned £50,000 in 2021=whose income rises in line with actual and forecast consumer price index (CPI) inflation1, could see their income tax bill rise from £7,486 to £15,825 by 2028.
Inheritance Tax nil-rate Band
What has changed? The IHT nil-rate band and residence nil-rate band have also froze for another two years until 2028. The IHT nil-rate band has remained at £325,000 since 2002. Over this period, the average UK house price has surged by 77% from £154,006 to £273,135 in 2022, according to Nationwide3. By 2028, families will have missed out on almost 20 years of inflation-linked increases. The residence nil-rate band – an additional allowance for those who pass on their main residence to children or grandchildren when they die – was last increased in April 2020 to its current level of £175,000.
Pension Lifetime Allowance
What has changed? Nothing. It was expected that the pension lifetime allowance – the total amount you can save into your pension before incurring tax charges – would also be frozen for another two years, but this did not happen. The existing freeze will therefore end in 2026 unless anything changes between now and then. The lifetime allowance rose in line with CPI inflation between 2018/19 and 2020/21 but has stayed at its current level of £1,073,100 since then. If it were to keep pace with actual and projected CPI1 and retain its value to individuals, the lifetime allowance would need to rise to £1,432,337 by 2026.
Pension Tax Relief
What has changed? Nothing. There were rumours that the Chancellor was considering scrapping higher rates of pension tax relief and moving to a single flat rate of 20%, but this did not come to fruition. Higher and additional-rate taxpayers can continue to benefit from tax relief of up to 40% and 45%, respectively (subject to limitations).
What has changed? The state pension will increase in line with inflation by 10.1% in April 2023. Those who qualify for the full state pension will receive an additional £870 in the 2023/24 tax year.
OBR’s economic and fiscal outlook accompanied the Autumn Statement, painting a gloomy picture of the UK economy. High inflation is expected to result in living standards declining by 7% in total over the two years to 2023/24. The OBR warned that the squeeze on real incomes, rise in interest rates and fall in house prices would weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022. GDP is forecast to fall by 1.4% in 2023 before rising by 1.3% in 2024 as energy prices and inflation drop.
Higher taxes and lower spending should eventually help to bring down inflation, which rose to a 41-year high of 11.1% in October. This decrease will, however, be of little consolation to households who face paying more tax at a time of squeezing wallets. Freezing tax thresholds draws more people into the income tax net, more assets into taxable estates for inheritance tax purposes, and diminishes the real value of the pension lifetime allowance.
1. Based on ONS data until 15/10/22 and thereafter inferred by inflation swaps (Refinitiv Datastream)
2. HMRC IHT thresholds
3. Nationwide house price index
4. HMRC tax receipts
5. OBR economic and fiscal outlook, November 2022