We asked paraplanner, Ryan Gordon to help simplify the changes that may affect our clients.
This year has been particularly unusual with the new Chancellor, Jeremy Hunt’s recent budget plan coming only two months after his predecessor’s, Kwasi Kwarteng. Many may be left unsure as to what has changed and how this will affect them, so this article will answer the question on many people’s minds; ‘How will this autumn budget plan impact me?’
Firstly, to provide some context, Hunt proclaimed in his speech that this budget plan would provide “stability, growth and the sufficient funding of public services”. This assertion was expected as his budget arrives at a time of soaring inflation, a global energy crisis in part caused by Putin’s war in Ukraine, poor UK economic growth and UK debt interest spending forecast to hit record highs. The fragile situation had not been helped by his predecessor’s September “growth” plan which introduced a plethora of tax reductions intended to inject a shot of growth into the UK’s struggling economy. Unfortunately for the Government at the time, the announcement of these policies had a dramatic impact on the markets, with the pound falling drastically and gilt yields rising. Therefore, the most noticeable detail of Hunt’s budget was the reversal of the majority of his predecessor’s policies in order to restore confidence in the market. Hunt emphasised that the revisions within his budget would realign the Government with the Bank of England’s inflation measures and would rectify the UK’s over reliance on debt.
The first policy of note was the freezing of the personal allowance and higher rate threshold for income tax. Both thresholds will be frozen at their current level until at least April 2028. These frozen tax thresholds, at first glance, may appear benign. However, they are insidious in nature, as they drag millions of tax payers into the higher tax thresholds due to the effects of inflation. The approach is known as fiscal drag and is a calculated way for Governments to increase tax revenues in a covert manner. The budget plan also saw a blunter tool applied, with the additional rate threshold for income tax being reduced from £150,000 to £125,140, which will see approximately 250,000 taxpayers fall into the additional rate tax bracket. The Office for Budget Responsibility (OBR) said it estimated that there would be 3.2 million new taxpayers created by the now six-year freeze on the personal allowance and that the freezes take the real value of the personal allowance in 2027-28 back to its 2013-14 level.
This makes taxation for those individuals with over £100,000 of income particularly uncomfortable. Those whose income falls within £100,000 and £125,140 are taxed at a rate of 60% on earnings within this range as their personal allowance is reduced by £1 for every £2 over £100,000. Immediately above this range, the individual now finds themselves as an additional rate tax payer. There is some good news as, fortunately, there has been no change to the annual pension contribution allowance. This means that you may still maximise the pension contributions you may make within each tax year as an effective way of reducing your total income to avoid falling into a higher tax bracket.
The most noticeable detail of Hunt’s budget was the reversal of the majority of his predecessor’s policies in order to restore confidence in the market.
Capital Gains & Dividend Allowance reduction
As of next April, the capital gains annual exemption will be reduced from £12,300 to £6,000. This allowance will be halved once again to £3,000 in the 2024/25 tax year. This is a large reduction of the allowance and those with assets that they were intending to sell will be impacted considerably by these changes. Those potentially impacted have four months to utilise this tax year’s capital gains tax exemption before it is reduced. Where appropriate the spousal exemption for capital gains tax could be used to equalise the assets before selling, which means both exemptions could be fully used.
The dividend allowance will also be reduced from £2,000 to £1,000 and then further reduced to £500 again in the 2024/25 tax year. This will have an impact on those who rely upon dividends to meet expenditure, as their net income will be lower. These changes to dividend tax are a reminder of the benefits of investing through an ISA, which come with a generous annual allowance of £20,000 of tax-free savings.
Triple Lock Pension continuation
Some welcome news for pensioners as Hunt’s budget confirmed that the State Pension would continue to honour the ‘triple lock guarantee’ and, as such, the State Pension will be increased by 10.1% next April in line with inflation. This is welcome news for those who rely on the State Pension, but there is an arising concern that, as the State Pension increases in line with inflation, there may be a point in the future where the personal allowance is less than the State Pension to be received and more and more pensioners will be pulled into the income tax net.
The inheritance trap continues to widen and places greater emphasis on estate planning.
Inheritance Tax frozen
Both the Inheritance Tax (IHT) Nil Rate Band of £325,000 and the Residence Nil Rate Band of £175,000 have been frozen until the 2027/28 tax year. Like the freezing of the income tax brackets, the impact of this is that inflation will eat into the value of the inheritable assets that can be passed tax free to future generations. The IHT Nil Rate Band has been frozen since 2009, which, had this been raised in line with inflation, would see us with a nil rate band worth over £500,000. The inheritance trap continues to widen and places greater emphasis on estate planning.
- Additional rate income tax threshold reducing from £150,000 to £125,140.
- Capital gains tax annual exemption decreasing from £12,300 to £6,000, then reducing further to £3,000 in 2024.
- Dividend annual allowance decreasing from £2,000 to £1,000, then reducing further to £500 in 2024.
- Inheritance tax nil rate band frozen until 2028.
- State Pension triple lock is retained
To discuss how any of these changes might affect your personal situation, please do contact your investment manager to arrange a meeting with one of the wealth planning team, particularly around estate planning with a view to minimising your inheritance tax liability.
The information provided in this article is of a general nature. It is not a substitute for specific advice with regard to your own circumstances.
Illustration by Jordan Atkinson