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.
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:
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.
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:
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.
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:
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.