TaxNov 10 2022

What to expect in the Autumn Statement

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What to expect in the Autumn Statement
Chancellor Jeremy Hunt, who is due to reveal the Autumn Statement next week (Image credit: REUTERS/Henry Nicholls/File Photo)

It will be the UK's third budget in a year and there is a gap in Treasury coffers that Hunt will be keen to fill.

The Treasury balance sheet is full of moving parts, and high inflation can both decrease the “fiscal hole”, by pulling more into tax bands, but also will make government debt more expensive due to the high proportion of it that is inflation-linked.

The chancellor has previously said that he wants public debt to fall as a share of gross domestic product in the next five years, and if he is to adhere to that he must raise between £40bn and £55bn in the next year.

Sunak and Hunt will be entering into a supermarket suite of freezing any and every tax allowance they can lay their hands onChris Etherington, RSM

Many of these are likely to be in the form of taxes, and we have taken a look at the most important changes that could be ahead.

Previous governments have looked at an increase in VAT as a way to generate significant revenues, however any increase in this tax would go against Hunt’s declaration that the higher tax burden should be placed on those who have the broadest shoulders.

The poorest fifth of the UK population currently pay 23 per cent of their income on indirect taxes compared with 9 per cent for the richest, according to the Office for National Statistics.

Any rise in the tax would also effectively push up inflation, which Chris Etherington, a tax partner at RSM, said would be akin to “a footballer throwing the ball into their own net”.

Instead, Etherington said, Sunak and Hunt will be “entering into a supermarket suite of freezing any and every tax allowance [they] can lay their hands on.”

Dividend tax

It has been previously reported that Hunt is looking at raising the dividend tax rate, cutting the tax-free allowance for dividends and changing the tax-free allowances for the capital gains tax.

The Treasury has been modelling a 1.25 percentage point increase in dividend tax across each tax band, raising the ordinary rate to 10 per cent, the upper rate to 35 per cent, and the additional rate to 40.5 per cent. 

A potential dividend tax raise is yet another reminder to make use of ISAsJason Hollands, Evelyn

The current tax-free annual dividend allowance is £2,000, having been cut from £5,000 in 2017, and it may be reduced to £1,000 which could raise £455mn.

Jason Hollands, managing director at Evelyn, said any further moves to raise taxes on dividends will be a blow to business owners, many of whom pay themselves partially or primarily through dividends rather than salaries, as well as retirees who rely on dividend income to supplement their pensions.

“It’s yet another reminder to make use of ISAs, as far as possible as a tax-free umbrella for owning investments,” he said.

“Shares or funds held in a taxable environment can be sold and repurchased within ISAs – a process known as Bed and ISA - to ensure that future dividends are free from the grasp of the taxman.”

However, people should take care not to incur a capital gains tax hit during the process, he added.

Income tax

Earlier this year, in his first campaign to be prime minister, Sunak promised a cut in the basic rate of income tax.

His plan was to cut the current 20 per cent tax rate to 19 per cent in 2024, and down to 16 per cent by the end of the next parliament in 2029.

The “mini” Budget introduced by then-Chancellor Kwasi Kwarteng in September brought forward a number of Sunak’s pledges.

Kwarteng said he would drop the basic rate to 19 per cent in April 2023, as well as abolishing the additional rate of tax entirely, which is 45 per cent on income over £150,000.

However this was swiftly reversed in what some said was an “embarrassing” U-turn from the then-government.

The government are stuck between a rock and a hard place at the momentShaun Moore, Quilter

Sunak and Hunt are expected to freeze personal allowances further than the current April 2026 expiry date, pushing millions into higher tax bands.

Etherington said this “fiscal drag” is more attractive than a simple rise in income tax is more politically appealing, which he said is a “brazen attempt to conceal an income tax rise by the back door”.

Hollands said the main route to mitigate exposure to higher rate income tax is through making pension contributions, as these currently provide tax relief at your marginal rate. 

“Those who have the option of contributing via salary sacrifice should certainly consider it as this system offers relief from National Insurance in addition to income tax,” he said.

The freezing of allowances will lead to the UK population being worse off, according to Quilter, which has calculated the below:

 

Amount worse off after 

   

Starting salary

1 year (assuming 3% wage growth per year)

2 years

3 years

4 years

5 years

£25,000.00

£75

£153

£233

£316

£400

£35,000.00

£75

£153

£233

£316

£400

£50,000.00

£321

£708

£1,106

£1,517

£1,939

£70,000.00

£377

£765

£1,165

£1,577

£2,002

£100,000.00

£977

£1,983

£3,020

£4,088

£5,187

Source: Quilter

Inheritance tax

Another threshold that could be frozen is inheritance tax, which is currently a 40 per cent tax on any estates above £325,000 (known as the nil rate band).

The rates of IHT have been steadily increasing in recent years as property prices inflate, pulling more people into the net, and though house prices have begun to fall, this might not be reflected in IHT receipts for some times. 

Andrew Tully, technical director, Canada Life, said inheritance tax bills can be reduced, but only with “considerable” planning.

“These include setting up a trust, making full use of gift allowances which allow you to pass on money to family while reducing your estate, and leaving a legacy to a charity within your will.”

Moore added: “The government are stuck between a rock and a hard place at the moment as they continue to have to cope with the significant debt it took on to cope with the pandemic but also now has the unenviable job of needing to help alleviate a cost-of-living crisis.

"Extending the frozen thresholds for an additional two years is an inheritance tax raid by stealth."

Capital Gains Tax

The amount of capital gains tax collected has risen in recent years as rumours abound about the prospect of an increase in these rates.

The Treasury has confirmed it is looking at changing the tax-free allowances for capital gains tax, including potentially scrapping the CGT uplift on assets that occur on death, which means individuals inheriting assets would have to pay capital gains tax on those assets.

There has also been the suggestion that the government was looking at making CGT payable for primary homes, though this has been disregarded as it wouldn’t necessarily raise enough money.

It would also be an enormous administrative burden for the Treasury.

Scrapping higher-rate pension tax relief would hit middle England directly in the pocketTom Selby, AJ Bell

The problem with changing CGT, Etherington said, is that it's hard to know how hard you can push this rate, as a large amount of the CGT revenues are generated by a small number of taxpayers.

The latest figures show that 309 taxpayers accounted for the last billion of CGT receipts.

“It is a minefield for the chancellor, who will need to find the points at which taxpayers will tolerate an increase or whether [a change] would significantly distort their behaviour.”

Pensions

Another area for potential taxation is the higher-rate pension tax relief, the scrapping of which could raise around £10bn according to estimates. 

Head of retirement policy at AJ Bell, Tom Selby, said: “Scrapping higher-rate pension tax relief would hit middle England directly in the pocket – a section of society the conservative party can ill afford to alienate.”

Selby also said with automatic enrolment “relatively fragile” as the cost-of-living squeeze drones on, there may be concerns scrapping higher-rate relief could spur a rise in opt-outs.

And with older generations having benefited from higher-rate relief, Selby said scrapping it now would disadvantage younger workers.

Potential impact of scrapping higher-rate pension tax relief*

Annual personal pension contribution

Upfront basic-rate tax relief

Value of higher-rate relief (reclaimed from HMRC)

Value of lost higher-rate relief over 35 years

Potential value of lost higher-rate relief over 35 years (if invested**)

£3,000 (£250 per month)

£750

£750

£26,250

£57,449

£6,000 (£500 per month)

£1,500

£1,500

£52,500

£114,897

£12,000 (£1,000 per month)

£3,000

£3,000

£105,000

£229,795

*Assumes entire pension contribution qualifies for higher-rate tax relief
**Assumes higher-rate relief is invested each year and enjoys 4% investment growth after charges
Source: AJ Bell

The pensions lifetime allowance is another potential area for the Treasury to look at, however there is concern this would send the wrong message to savers during a time when many will be thinking of lowering their pension contributions amid the cost-of-living crisis.

Tully said: “It penalises good investment performance as much as it does those able to pay higher contribution rates. 

“It also shines a spotlight firmly on the inequality between those who still enjoy DB pensions and those in DC arrangements. In real terms, the lifetime allowance is less than half what it was 10 years ago.”

He added that scrapping the lifetime allowance and having one annual allowance restricting savings into defined contribution pensions would massively simplify pensions at a stroke, but he doesn’t expect this to happen in the upcoming budget.

In addition, any suggested changes to the pension tax system would likely be subject to a major, and lengthy, consultation and implementation process.

Tully said: “[Therefore] any financial gains would be over the medium to long-term rather than the short-term boost the Government coffers need.”

Finally, there are the non-dom rules. These will be particularly sensitive for the prime minister, whose wife was criticised last year for making use of the regime.

Any changes to the non-dom regime would require consultation, so even if they were announced in this budget, they would take longer to be implemented.

sally.hickey@ft.com, ruby.hinchliffe@ft.com