Financial planning implications of the Autumn Statement

On Thursday 17 November, new chancellor of the exchequer Jeremy Hunt delivered a wide-ranging Autumn Statement in an effort to deal with today’s cost of living crisis, reduce government borrowing and help rebuild the UK economy. This article outlines the main decisions Jeremy Hunt made on tax, how they could affect you and how you could potentially respond to them.

Soberingly, Mr Hunt pointed out that the pandemic has led to problems with the production and transport of goods, which, in turn, has led to price rises that have driven up inflation. Against this backdrop, the chancellor said he wanted to bring down inflation and reduce government borrowing.

Jeremy Hunt added that he needs to find £55 billion in savings and tax rises in order to balance the government’s books. Some of these tax increases will come from ordinary taxpayers. Hunt said, ‘I have tried to be fair by following two broad principles: firstly, we ask those with more to contribute more; and secondly, we avoid the tax rises that most damage growth.’

A bigger tax net

We now outline what tax changes have been made in the Autumn Statement, what they mean in broad financial planning terms and how you could potentially benefit from the tax incentives that have been left in place.

First, the annual income threshold for the 45 per cent additional rate of income tax will be reduced from £150,000 to £125,140 from April 2023. As our ‘Pensions and your personal allowance’ article shows, people earning between £100,000 and £125,140 are already, in effect, paying a 60 per cent income tax rate. This is because, for every £2 of salary above £100,000, the personal allowance is reduced by £1. From April, people will have to pay a 45 per cent tax rate on any earnings above £125,140. This will reduce their disposable income.

Second, Hunt is maintaining at current levels the income tax personal allowance, higher rate threshold, main national insurance thresholds and the inheritance tax thresholds until April 2028. These static tax bands mean that, as people’s earnings increase, more of us will fall into higher tax brackets. Once again, this can reduce our disposable income.

Third, the capital gains tax (CGT) allowance will be cut from £12,300 to £6,000 in April 2023 and then to £3,000 in April 2024. As our article ‘How to reduce your capital gains tax liability’ explains, CGT is a tax on the profit (the ‘capital gain’) made from an asset that has increased in value, typically when the asset is sold. It applies to items including: property that is not a main home; investments not held in tax-efficient schemes such as Isas or pensions; and business assets.

The reduction in CGT means more of us could be liable for tax when selling investments. Consequently, we may want to consider options such as Isas, pensions, venture capital trusts (VCTs), onshore bonds or offshore bands, which are not subject to CGT.

Finally, the share dividend tax-free allowance will be cut from £2,000 to £1,000 in April 2023 and then to £500 from April 2024.

A key implication of the Autumn Statement is that, if you’re investing a lump sum, then you need to be aware of how much income you get from the investment. Dividend income or interest is added to your salary for tax purposes. If your salary is rising but tax bands are static then you could end up paying higher rates of tax on interest or dividends. Moreover, reduced dividend allowance could result in more of your income being subject to tax.

Financial planning is vital

This means that financial planning could become even more important for many of us. Ensuring we’re using a suitable blend of different tax wrappers, such as Isas, dividend allowance, VCTs, pensions, and onshore and offshore bonds where appropriate, could be even more crucial when tax allowances are limited.

Furthermore, if investment returns are eroded by tax then you could consider using spouse’s allowances. If your spouse isn’t earning an income and you use their allowances, then you could potentially reduce your overall tax payments.

Crucially, pensions allowances have been retained. This means people who have not used up their pensions allowance, for example, may be able to reduce tax liabilities by transferring more of their income to their pension.

Using tax-exempt Isa allowances can also help reduce tax. But Isa investments are limited to £20,000 a year per person, which may not be sufficient for someone with a large lump sum. So an onshore bond, in which tax is deferred on withdrawals of up to 5 per cent a year, may be a good choice in these kinds of situations.

In the end, you need to know what options are available to you and are right for your circumstances. The Autumn Statement will lead many of us to pay more in tax. But a good financial adviser can help you devise a long-term plan to make the most of the tax benefits still offered by the government for our use.