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.
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 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.
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.