Tax  

What the Autumn Statement means for your clients

  • Describe the main tax changes mentioned in the Autumn Statement
  • Identify how freezing the tax bands will affect taxpayers
  • Explain some steps clients can take to mitigate the tax rises
CPD
Approx.30min
What the Autumn Statement means for your clients
Photo: JESSICA TAYLOR/UK PARLIAMENT/AFP via Getty Images

Unlike his predecessor, chancellor Jeremy Hunt delivered an Autumn Statement last week that had few surprises in it. However, the changes announced will have a significant impact on finances. This will no doubt be of concern to clients but there are significant planning opportunities available.

Below I detail some of the changes made, how they impact personal finances and what planning opportunities there are as a result.

The reduction in the threshold for the 45% income tax rate to £125,140

Just eight weeks after the announcement that the top rate of income tax would be abolished, Hunt has pulled around 250,000 more people into the top rate, which will cost them each £620 on average, according to HM Treasury figures.

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The 629,000 people already in the higher rate bracket will pay just under £1,250 more in tax. 

Impact on take home pay of reduction higher rate tax threshold to £125,140

Salary

Tax before

Tax after

Impact

£130,000

£44,460

£44,703

£243

£135,000

£46,460

£46,953

£493

£140,000

£48,460

£49,203

£743

£145,000

£50,460

£51,453

£993

£150,000

£52,460

£53,703

£1,243

£160,000

£56,960

£58,203

£1,243

£170,000

£61,460

£62,703

£1,243

£180,000

£65,960

£67,203

£1,243

£190,000

£70,460

£71,703

£1,243

£200,000

£74,960

£76,203

£1,243

With the UK government facing pressure on its finances following the pandemic and energy price guarantee, Hunt has cast aside former chancellor Kwasi Kwarteng’s theory that you can cut taxes to stimulate growth, and instead is prioritising to fill the black hole by a combination of tax increases and stealthy allowance freezes.

However, those with higher incomes impacted by this reduction of the 45 per cent threshold are often the people who can afford to plan their tax affairs and are likely to have more than one source of income, therefore it is probable there will be an increase in the take up of tax advice. 

For clients likely to be pushed into paying the highest rate of tax, one common approach is to advise them to save extra money into their pension.

It reduces their salary for income tax purposes, and it could bring them back down a tax band, although this will mean bringing home less money at a time when prices are soaring.

There are other ways they may be able to get themselves back into the 40 per cent tax bracket. For example, through a salary sacrifice scheme, where you can give up some of your salary in exchange for a benefit – but this only works if you are not too far over the threshold.

Freezing income tax thresholds

The chancellor has also frozen income tax thresholds for basic (20 per cent) and higher rate (40 per cent) taxpayers for a further two years until April 5 2028. 

Our calculations show that if wage growth is on average 5 per cent a year for the next five years but income tax thresholds remain frozen, then someone earning £50,000 today would be £3,403 worse off in the 2028/2029 tax year and in total be £9,765 poorer over the five-year period.

Even with wage growth of just 3 per cent per annum for the next five years, someone earning £50,000 would be £1,939 worse off in the 2028/2029 tax year and £5,592 poorer over the five-year period.

These calculations illustrate the power of fiscal drag and how freezing income tax thresholds is a form of stealth tax.

Ultimately, if thresholds remain frozen for a number of years, then people will end up paying considerably more tax.

3% wage growth

 

 

 

 

 

 

Amount worse off after

 

 

 

Starting salary

1 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

 

 5% wage growth

 

 

 

 

 

 

Amount worse off after

 

 

 

Starting salary

1 year

2 years

3 years

4 years

5 years

£25,000.00

£126

£258

£396

£542

£695

£35,000.00

£126

£258

£396

£542

£695

£50,000.00

£572

£1,229

£1,919

£2,643

£3,403

£70,000.00

£628

£1,288

£1,981

£2,708

£3,472

£100,000.00

£1,628

£3,338

£5,134

£7,019

£8,500

*These calculations assume that wage growth increases by 3 per cent and 5 per cent a year and compares the tax paid if current bands remain frozen against the tax paid if the personal allowance, the basic rate band, the £100k personal allowance taper limit and additional tax rate band all increase in line with wage growth.