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.
Reduction in the annual exempt amount for CGT
Those investing with assets subject to capital gains tax are likely to be disproportionately affected. Instead of a freeze of the £12.300 threshold, this will reduce by more than half to £6,000 for 2023/2024 and then £3,000 for 2024/2025. For most trusts this will be halved again.
For couples fully using this allowance, a combined tax saving of £4,920 is currently available, reducing to £2,400 and then £1,200.
This assumption is for higher/additional-rate taxpayers with shares and mutual funds, rather than property where there is an additional 8 per cent liability, potentially creating greater concerns for landlords and second-home owners.
For investors sitting on gains, significant thought will be needed regarding the timing of disposals over this and the coming years to maximise the value of the reducing allowance.
Looking for any positives, speculation that private residence relief on one’s own home would come to an end was merely that, nor have the rates or CGT been equalised with income tax. Carry forward of losses also remains available.
The reduction in the dividend allowance
Elsewhere, Hunt also slashed the dividend allowance to £1,000 from £2,000 from next year and to £500 from April 2024.
The dividend allowance was introduced to help savers in 2017. Having initially been at £5,000, it has been frozen at £2,000 for the past five years; however, the £2,000 allowance covered the majority of savers’ dividend income.
The chancellor’s move will mean more people end up paying tax on their dividends and have to fill out a self-assessment form.
For a basic rate taxpayer, the reduction in the dividend allowance to £1,000 will mean they will end up paying £87.50 more in tax. Similarly, if you are a higher rate taxpayer this rises to £337.50 more in tax and £393.50 if you are an additional rate taxpayer.
