The Autumn Statement: Financial Planning Highlights
On Thursday the Chancellor, Jeremy Hunt, outlined three priorities as part of the Autumn Statement: stability, growth and public services. Here we take a look at those announcements that relate to financial planning.
These income tax rates remain in place for 2023/24.
Starting rate 0%
Basic rate 20%
Higher rate 40%
Additional rate 45%
The personal allowance and higher rate threshold of £12,570 and £50,270 respectively will remain at these levels until 5 April 2028.
The 45% Additional Rate above £150,000 is falling to £125,140. The income limit for full personal allowance is £100,000 based on adjusted net income. Where this exceeds £100,000, the personal allowance is reduced by £1 for every £2 over the £100,000 limit. If income is large enough, the personal allowance will be reduced to nil. That means individuals with adjusted net income of £125,140 will have their personal allowance reduced to nil. The effective tax rate for adjusted net income between £100,000 and £125,140 is 60%. If you are in the £100,000 plus ‘zone’ you should carefully consider the merits of pension contributions to reduce your adjusted net income.
The dividend allowance will be reduced to £1,000 effective from 6 April 2023 and then £500 from 6 April 2024. This is exacerbated by fact that the 1.25% dividend tax increases for 2022/23 are to be maintained in 2023/24.
Dividends in basic rate 7.5% + 1.25% = 8.75%
Dividends in higher rate 32.5% + 1.25% = 33.75%
Dividends in additional rate = 38.1% + 1.25% = 39.35%
Company shareholders are impacted by the dividend changes but in addition so will investors holding equity OEIC funds directly as they must distribute income. These OEIC holders will potentially also be impacted by the reduction in the Capital Gains Tax (CGT) Annual Exempt Amount (AEA) and the reduction in the 45% tax threshold.
From 6 April 2023 the National Insurance (NI) Primary Threshold, Lower Profits Threshold and the Lower Profits Limit will all be aligned with the personal allowance at £12,570. The rates for NI will drop back to their 2021/22 levels. This was 12% for employees earning between the Primary Threshold and Upper Earnings Limit (£50,270) and 2% on all earnings about the Upper Earnings Limit. For employers, any income above the Secondary Threshold of £9,100 can be subject to NI at a rate of 13.8%. However, employers whose total NI bill is below £5,000 will have no NI to pay thanks to the Employment Allowance. This slight increase of the Primary Threshold from its effective rate of £11,908 for the 2022/23 tax year coupled with the reduction in the effective rates of NI will provide a modest increase to take home pay.
The initial reduction in the CGT AEA to £6,000 is a significant decrease and will impact those client’s invested in OEICs, shares or property. The further reduction to £3,000 in 2024 means it will bring it to just under 25% of its current level. The announced changes will also impact trustee investments. Trustees are entitled to an annual exempt amount of half that available to individuals. So while currently trustees have an AEA of £6,150, going forward this will reduce to £3,000 in 2023/24 and £1,500 in 2024/25. Owners of rental properties will be affected however its unlikely having to pay a bit more CGT will deter this type of investor. The incentive for investing in property tends to be an attractive longer term income yield which is unaffected by the CGT changes, but may be impacted by some of the wider changes announced. No changes have been made to the CGT rates which remain at 10% for individuals where the gain falls within the basic rate band or 20% if the gain is in the higher or additional rate bands (the rates are 18% or 28% for gains relating to residgential property).
The IHT nil-rate band (NRB) will continue at £325,000, the residence nil-rate band (RNRB) will remain at £175,000, and the residence NRB taper threshold continues at £2 million. This means a single person maximising the NRBs can pass on up to £500,000 with no inheritance tax liability while a married couple or those in a civil partnership can pass on up to £1 million without an inheritance tax liability.
The three-pronged approach to corporation tax in the future is described below:
Corporation tax will remain at 19% for the Financial Years starting 1 April 2021 and 1 April 2022.
From 1 April 2023, the headline (i.e. main) corporation tax rate will be increased to 25% applying to profits over £250,000.
A small profits rate (SPR) will also be introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. The Small Profits Rate will not though apply to close investment holding companies.
Companies with profits between £50,000 and £250,000 will pay tax at 25% reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rates as profits increase from £50,000 until the 25% rate kicks in. The marginal relief fraction is 3/200. The end result if you do the sums is that each £1 of profit between £50,000 and £250,000 is taxed at an effective marginal rate of 26.5%.
Following considerable speculation about how much state pension payments would rise by in 2023-24, the Chancellor confirmed pensioners would receive a 10.1% increase, in line September's inflation - a formula outlined in the state pension triple-lock guarantee. This was first introduced in 2010 by the Conservative-Liberal Democrat coalition government and means that payments are increased each year by whichever rate is the highest of either average earnings, the Consumer Prices Index (CPI) inflation, or 2.5%. This means the state pension will be worth in excess of £10,000 for some people next year.
The stamp duty cuts announced in September's mini-budget will remain in place until 31 March 2025, and will then be removed. Until this date, first-time buyers won't need to pay stamp duty on the first £425,000 of the property they buy (up from £300,000); existing homeowners won't have to pay on the first £250,000 (up from £125,000). The Chancellor said the Office for Budget Responsibility (OBR) expects housing activity to slow over the next two years, by which time the government may introduce new ways to help the housing market.
The National Living Wage, currently £9.50 for workers over 23, will also rise by just under £1 to £10.42 from April 2023. The government says that it will benefit around two million of the lowest paid workers and represents an annual pay rise worth over £1,600 to a full-time worker.
To read the full Autumn Statement you can visit the gov.uk website: https://www.gov.uk/government/publications/autumn-statement-2022-documents.
