Autumn Statement 2022


On 17th November, new Chancellor Jeremy Hunt, alongside new Prime Minister Rishi Sunak, delivered their Autumn Statement 2022. A far cry from the previous regime’s focus on “growth, growth, growth”, Hunt’s message was one of facing up to reality in light of harsh economic times up ahead.

While the legislation changes announced in the Statement were perhaps more muted than expected, there are some areas that we believe will be of particular interest to our clients.

  1. Direct Investments

Clients who hold their investments directly, e.g. through a General Investment Account, will take a double-hit of increased taxation as a result of the Statement, with both the tax-free Dividend Allowance and Capital Gains Tax exemption announced to shrink considerably over the next few years.

 

 

Dividend Allowance

Capital Gains Tax Exemption

Current

£2,000

£12,300

From April 2023

£1,000

£6,000

From April 2024

£500

£3,000

 

In brief, investors will be paying more tax on income and capital growth generated by their investments than they previously were. Additionally, these changes could see some investors having to complete a tax return where previously they didn’t need to.

Solutions

So what options are available to investors to offset these tax increases? Our view is that the fundamentals of our advice should not change; most importantly, clients should continue to ensure that they are using their ISA and pension allowances each year so that as much money as possible is held in a tax-efficient environment:

  • Individuals can contribute up to £20,000 a year to their ISAs and benefit from tax-free growth and income, unaffected by the changes in allowances.
  • Pensions also provide tax-free growth and income within the wrapper, and additionally provide tax relief on contributions paid personally. The amount that can be contributed to pensions will depend on personal circumstances.

With the Government looking to increase their tax take from directly held investments over the coming years, it is now more important than ever for investors to ensure they are taking advantage of these allowances annually and holding as much of their money as possible in these tax-efficient wrappers.

But what further options do investors have once ISAs and pensions have been maximised? There is another tax wrapper that has become a more attractive proposition.

Investment bonds, both onshore and offshore, are free from income tax and CGT within the wrapper (although onshore bonds are subject to corporation tax on growth) and there is no limit on the amount that can be contributed. They also offer the opportunity to take regular income with no immediate liability to income tax. The trade-off is that profits are subject to income tax and the rules around this area are complex. Whether investment bonds are an appropriate solution will depend on individual circumstances.

  1. Additional Rate Tax

Also announced in the Statement, the threshold at which individuals will pay additional rate tax of 45% will be falling from £150,000 to £125,140 from April 2023 – quite a turnaround from the previous Chancellor who attempted to scrap additional rate tax altogether! You may question why this figure is £125,140 and not £125,000; the answer is that this brings it in line with the threshold for complete loss of the Personal Allowance, which is reduced by £1 for every £2 of income over £100,000 (Personal allowance £12,570 x 2 = £25,140).

The table below illustrates the effective tax rates above basic rate, including the “tax trap” between £100,000 and £125,140, due to the tapering Personal Allowance:

 

 

Current Effective Tax Rate

From April 2023 Effective Tax Rate

£50,270 - £100,000

40%

40%

£100,000 - £125,140

60%

60%

£125,140 - £150,000

40%

45%

£150,000+

45%

 

Solutions

So how do those with income above £100,000 ensure they don’t pay such high rates of income tax? Again, we believe that our advice should not fundamentally change here, and pension contributions can be an invaluable tool to offset the changes announced in the budget.

Contributions made by individuals into their pension can provide tax relief in the following ways:

  • Tax relief of 20% is added directly into the pension by HMRC.
  • Further relief can be claimed for higher and additional rate taxpayers, at 20% and 25% respectively.
  • Contributions can also allow high earners to reclaim their Personal Allowance and thereby avoid the 60% tax trap.

For those earning over £100,000, the combination of tax relief detailed above can lead to substantial tax savings. There are however limits on the level of contribution that can be made, and there are other planning opportunities available to reduce clients’ income tax bill which can be explored.

  1. Other Areas

While we view these as the two main changes that will impact on our clients, there are a handful of other areas worth bearing in mind that could impact on you:

  • The Chancellor announced that the Energy Price Guarantee, fixing the cost of energy to £2,500 for a typical household, will increase to £3,000 from April 2023. With the cost of living expected to continue to increase through the next year, it is essential that clients review their expenditure needs and objectives at annual reviews and discuss any changes with their adviser.
  • It was also announced that the State Pension triple lock will be applied in April 2023, meaning the State Pension will increase by 10.1% in April; good news for those who rely on the income to meet their essential expenditure needs, particularly in the face of the ever-increasing cost of living. Again, we would urge clients to consider their financial objectives at annual reviews as prices continue to increase.
  • Finally, the Chancellor announced that all tax allowances will be frozen until April 2028 (other than those detailed above). We think this is particularly important for clients who have inflation-linked income sources, who could see themselves moving up the tax bands and having to settle more tax than perhaps they were expecting too.

If you would like to discuss any of the points raised in this article in more detail, please contact your financial adviser.

The Financial Conduct Authority does not regulate tax planning.

The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance.

The information contained within this article is for guidance only and does not constitute advice which should be sought before taking any action or inaction.






Article published: 29/11/2022

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