Rishi Sunak delivered his Spring Budget yesterday, and a hotly anticipated one it was too.
Several tax consultations have been doing the rounds and with the need to start to pay back the “Covid-debt”, speculation was intense on what tax changes, if any, would appear.
Many commentators felt the Budget would be about spending and economic stimulus this time, with substantial tax changes put off until later, possibly another Budget in the autumn.
In the end there was, as expected, stimulus and support for the economy as well as a start in raising taxes.
Some rises will affect people from right across the wealth spectrum and others will only really impact ‘higher net worth’ individualsNone of the changes suggested by the previous tax consultations came to fruition so it looks like “Tax Day” on 23 March when many of the tax consultations will be published could be important.
I suspect these will give us an idea of the more fundamental, longer-term future of taxation for the years ahead such as changes to the taxation of capital gains or the long-expected changes to pension tax relief.
After a long summer of consultation, we may see some more substantial tax changes in a potential Autumn Budget.
Mr Sunak has, though, started to raise tax to “strengthen the public finances”. Some rises will affect people from right across the wealth spectrum and others will only really impact ‘higher net worth’ individuals.
I wonder if the Chancellor was perhaps inspired by one of the snowy days last month because, essentially, what has happened is a big freeze.
As advised back in November, there is going to be a small increase to the tax-free personal allowance up £70 to £12,570 and the basic rate tax band is being extended by £200 to £37,700.
This means higher rate tax will begin at £50,270; (as an aside, people in Scotland have different tax rates and bands dictated by the Scottish Government).
This will then be frozen until 2025/26, along with the pensions lifetime allowance, the annual capital gains tax exemption and the inheritance tax nil rate bands which have not been changed. The Isa allowances, other pension allowances and special savings rates for savings income and dividends are also unchanged.
A widely expected increase to corporation tax was announced.
Freeze on allowances
The blanket freeze on most of the mainstream allowances means the Chancellor has made a start on raising revenue, while maintaining his party’s manifesto commitment not to raise the rates of key taxes.
Freezing allowances for short periods of time does not make much difference but over longer periods does have an impact.
We have seen this with the IHT nil rate band having been frozen for over ten years now – the amount of tax raised and estates paying tax has doubled. The current average IHT bill is £179,000 for those who pay it.
The Chancellor expects to raise around £70bn over the next five years just with this freeze and the corporation tax changes.
The increase in the tax bands and NI rates will see a modest increase in take home pay for all. This will broadly be between £22 to £50 for next year.
However, the freeze on future inflationary increases will see more people move into higher rates of taxation through pay rises between now and 2026. The expected additional tax take is around £19bn.
The easiest way for people to reduce their income tax liability is to make a pension contribution. But they should also ensure to split income between partners, so two sets of tax allowances can be used and in some cases investment portfolios being placed in tax efficient wrappers such as Isa, pension and insurance bonds.
Capital Gains Tax
This will not affect many investors, with any increases being relatively low and, while welcome, largely immaterial. Mainstream investors holding Oeics or other stocks and shares will simply amend encashments to remain within the allowance.
Given business owners and property investors can not really phase withdrawals it will probably be these people who will pay a little more tax, especially as the sale proceeds will likely be higher than the average investment portfolio. Only an extra £65m is expected to be raised here.
IHT freeze
As previously mentioned, the IHT nil rate band has been frozen for over a decade and has seen receipts and payers more than double.
This further freeze, along with the relatively new main residence nil rate band being frozen, will see more estates paying more tax. The good news is that there are many straightforward and simple solutions to ensure people only pay the amount of IHT they want to pay.
Corporation Tax
Corporation tax is returning to the days of having different rates for different amounts of profits. From 1 April 2023, those with profits up to £50,000 will continue to pay 19 per cent, those over £250,000, 25 per cent and everyone in between paying somewhere in between these numbers. This will affect the small business owner who typically pay themselves through a small salary and the balance of their income through dividends to benefit from the lower personal tax rates.
You must pay corporation tax before you can pay dividends so where peoples’ rates rise they will see a fall in their overall income. The changes are unlikely to be material enough to move away from a similar small salary/dividend strategy but will make the prospect of diverting some profits toward their pension even more attractive.
Lifetime allowance
The Lifetime Allowance freeze will hit those who the Chancellor probably sees as being most likely to have suffered least through the pandemic. Senior members of organisations with defined benefit pension schemes are most like to see themselves subject to increased taxation here although many people with other high value pensions, such as Sipps could also see a tax increase.
The key here is to take good financial advice and not “throw the baby out with the bathwater”. Some pensions arrangements are very valuable, especially defined benefit pensions, even after a tax charge so stopping your pension to avoid this tax is not necessarily the best thing to do.
In this Budget, the Chancellor has started raising taxes on the long road to strengthening the public finances. People from all across the wealth spectrum will start to suffer some degree of pain as a result. “Tax Day” later this month may enlighten us on what’s in store further down the road.
But just like a doctor treats bodily aches and pains, a good review of finances with a financial adviser could take the sting out of any potential additional tax pains or, at least, make them hurt a little less.
Les Cameron is head of technical at Prudential UK
