Very little of the speech from Jeremy Hunt on Thursday came as a surprise, as most of the changes had been floated in one form or another in the weeks preceding the Autumn statement.
Ultimately, he stuck with what are perhaps seen as “easy wins”, hitting higher earners and those with investments harder than the average working taxpayer.
There has been no tinkering with the rates of income tax and, again, investors have been saved from what would be significant increases if the rates of tax on dividends and Capital Gains were aligned with the standard income tax rates.
What are the new tax changes?
The tax rates that apply to dividends had been increased in April 2022 to add the 1.25% NHS levy to the charge, and whilst cuts to the tax free allowances for dividends were announced (reducing from the current £2,000 per individual to £1,000 per individual from April 2023 and £500 from April 2024) there was no comment on the rate of tax that applies to dividends received in excess of the allowances. The changes will cost a basic rate taxpayer £87 in 2023/24 and most higher rate taxpayers £337 in that year.
The largest impact of the announcements will apply to those whose income exceeds £125,140. At this point, the loss of the personal allowance of £12,570 has just about unwound. It is well known that the effective tax rate on income between £100,000 and £125,140 can be 60% or more.
At this level, from April, tax payers will move from this 60% bracket straight into the 45% bracket. In practice, the additional tax to pay as a result of this measure is likely to be £1,250 for an employee earning £150,000, which at the rate of just over £100 per month is unlikely to cause much of a ripple in the individual finances.
Where this change may be more sharply felt is for an entrepreneur that takes the bulk of their income as dividends. The differential between the higher rate and additional rate tax on dividends is 5.6% so that the increase in tax for this category of taxpayers becomes £1,400, and given that tax on dividends is paid through Self Assessment in January and July each year, the increase will be much more noticeable.
Have there been changes to Research & Development tax credits?
Many of our clients have benefited from Research and Development credits which increase the tax relief for smaller, independent companies to as much as 44% of the qualifying costs.
In the face of some targeted abuse of the scheme, the qualifying cost uplift is going to be slashed from 130% to 86% from 1 April 2023, that is still a significant tax saving at just over 35% of qualifying costs.
It is a little disappointing that rather than tackle the rogue operators who make inflated and often incorrect claims under the scheme, the Chancellor has elected to punish all businesses that genuinely qualify for the relief.
The tax rate of relief for the large company scheme has been increased, and the Autumn Statement document makes reference to a desire to align the small and large company schemes into a one size fits all arrangement, so in the longer term, the R&D scheme as we know it will probably disappear.
What changes are there to Capital Gains tax?
Investors have been targeted with the cutting of the tax free allowance for Capital Gains from the current £12,300 to £6,000 from April 2023 to £3,000 from April 2024.
The reduction in the 45% bracket threshold also has a further impact on this category of taxpayer, as those with total income between £125,000 and £150,000 will lose the £500 tax free allowance that applies to interest income.
In terms of the impact of this change, most investment managers are adept in making use of the annual allowance without tipping over it, and with a stock market that has been at a low for some time now, it may well be a while before many investors see a profit on their portfolios.
Unless there is an urgent need to cash in on an investment, Capital Gains tax is almost a voluntary tax in that it does not apply unless and until a profit has been crystallised, whether that is by selling an asset or perhaps giving it away.
Where the reduction in the Capital Gains Tax free allowance may have more of an impact is the housing sector. Houses are rarely sold to take the capital gain in the way that stocks and shares are traded, and the sale of a house often comes out of necessity.
The difference between selling a house on 1 March 2023 and selling on 1 May 2023 will be an additional £1,680 of tax for a higher rate tax payer.
The generous main residence relief is still intact so that an individual selling their main home will not have to pay tax on any increase in value, but the private landlord sector will feel the reduction in the allowances more than most.
Benefit in kind changes
The benefit in kind charges on Company cars remains in line with previous announcements, but the benefit rate from 2025/26 to 2027/28, including those that are fully electric, will attract an additional 1% per annum increase in the benefit rate.
Fully electric vehicles which have previously not been subject to Road Fund licences will be brought into the charge, with the rate applied depending on the date the vehicle was first registered.
What hasn’t changed from the Autumn Statement update 2022?
Personal income tax rates across the board remain at their current levels, including the tax rates that apply to dividends.
With the main rate of Corporation Tax increasing to 25% from next April, this may lead to some interesting calculations on how to best extract value from profitable companies.
Small trading companies – which the government estimates to be 70% of all companies in the UK – will be subject to the current 19% tax rate, but only if their profits are below £50,000 in a year.
We have become used to the timing of income and expenditure, making no material difference to a company’s tax position with the single standard rate of tax, but this changes with the return of the small companies rate.
In the next few months, entrepreneurs, especially those owning multiple companies, may benefit from planning the timing of contracts to make the best use of the coming opportunities.
The last increase in the Nil Rate band for Inheritance Tax purposes was in April 2009. The threshold was one of several tax free allowances frozen from 2010 onwards as a result of the banking crisis, but unlike Personal income tax allowances and National Insurance thresholds, it has never moved since then.
Historically, Inheritance Tax has been considered a tax that only applies to the very wealthy. However, in the 14 years since that last increase in the Nil Rate band, the average house price in the outer metropolitan area has more than doubled, so that individuals could well have become liable to Inheritance Tax on their estates on death simply by reason of being a house owner.
Although parents leaving their homes to family members have benefited from an additional £175,000 of the Nil Rate band since April 2020, and a married couple can effectively combine their thresholds to cover up to £1 Million of value in their estates, the freezing of these reliefs for another 5 years is going to see more and more families falling into the IHT net if house prices continue on the current trajectory.
Now, more than ever, careful advance planning will save your family £thousands in the longer term, contact Butt Miller Chartered Accountants today.