The magic of raising taxes without raising tax rates
The Chancellor of the Exchequer, the Rt. Hon. Jeremy Hunt MP, has today delivered his Autumn Statement - less than two months after his short-lived predecessor, Kwasi
Kwarteng, announced a raft of tax measures that were almost all reversed within days amid economic chaos.
The backdrop
Opening his Statement, Mr Hunt outlined three key priorities: stability, growth and public services. Blaming the UK’s high rate of inflation - currently more than 11% - primarily on global economic conditions, the Chancellor recognised the pressure on households from higher mortgage rates, fuel bills and groceries.
With the Office for Budget Responsibility now considering the UK to be in recession and unemployment expected to rise, Mr Hunt contrasted the need to make “difficult decisions” with a principle of maintaining “low taxes”. Although headline personal tax rates have remained at their current levels, and the Chancellor’s assertion that those with the broadest shoulders should pay more, it is certain that everyone will feel the pinch of real-terms tax increases.
What isn’t changing?
Given the multiple announcements, reversals and U-turns in recent months, it is worth reminding ourselves what is to stay:
- The additional rate of income tax of 45% is to remain
- The additional rate of income tax on dividends will remain at 39.35%
- The National Insurance increase of 1.25% continues to apply, and will become a standalone Health & Social Care Levy from April 2023
- The main rate of Corporation Tax will increase from 19% to 25% from 1 April 2023
Will reducing allowances increase tax take?
The Chancellor announced a number of cuts to various allowances and thresholds that will impact private clients in the higher tax brackets:
- The threshold above which the 45% additional rate of tax will apply is to be reduced from £150,000 to £125,140
- The tax-free dividend allowance will be reduced from its current level of £2,000 to £1,000 from 6 April 2023, and then to £500 from 6 April 2024. It would be surprising if this is not abolished entirely thereafter
- The annual exempt amount for Capital Gains Tax will be reduced from its current level of £12,300 to £6,000 from 6 April 2023 and £3,000 from 6 April 2024
The Government projects these two latter measures will raise an extra £1.2billion a year from April 2025. However, the payment of dividends and realising capital gains are very commonly within private clients’ control. A business owner may simply choose not to declare a dividend (with many already only paying dividends up to the £2,000 exempt amount). Capital gains can be easily avoided by simply not selling assets.
It remains to be seen whether HM Treasury will raise anywhere near the amount they project, once taxpayers’ actual behavioural responses are taken into account. Although these measures appear targeted at those “with the broadest shoulders”, many will see them as not going far enough.
When a freeze is actually a rise
The Chancellor announced that the tax-free personal allowance, higher-rate tax threshold and National Insurance Contribution limits will remain frozen until at least 6 April 2028.
In addition, the tax-free nil-rate band for Inheritance Tax will also be further frozen at its current level of £325,000 until at least 6 April 2028.
Taking into account the impact of inflation, as well as rises to the National Living Wage, these freezes will increase the tax take from existing taxpayers, as well as bringing more of those on low incomes into the tax net.
This is often referred to as ‘stealth tax’ - the rates and allowances remain the same, but the impact is felt in people’s pockets.
Stamp Duty Land Tax
The previous increase to the nil-rates of Stamp Duty Land Tax in England andNorthern Ireland will now be temporary. This was something of a surprise, being one of the only remaining announcements from the Truss administration that had not already been reversed.
Annual Tax on Enveloped Dwellings
ATED is an annual flat-rate charge payable by companies owning UK residential property, based on the value of the property.
The charges will increase by the September 2022 Consumer Prices Index rate of inflation of 10.1% for the 2023-24 ATED charge period. Although ATED has already been increased each year by the rate of inflation, this year will see a particularly substantial increase given the overall economic conditions.
Share-for-share exchanges
Prior to today’s Statement, non-UK domiciled individuals may have been able to benefit from restructuring provisions in order to ‘exchange’ shares in a UK-incorporated company for shares in a non-UK incorporated company. Draft legislation has been released to remove the Capital Gains Tax benefits, and it is effective for transactions from today (17 November 2022) onwards. The Government expects this measure to raise £830million over the next five years.
Actions to take
Some clients may wish to consider accelerating disposals of assets to make use of their current Capital Gains Tax annual exempt amount of £12,300. It may also be desirable to declare dividends of up to the current annual allowance of £2,000.
However, these are routine considerations that most private clients will already be aware of as part of their year-end tax planning, so substantive action may not be necessary.
For those who will be drawn into the higher 45% rate of income tax (or who already pay this top rate), they may wish to consider ways of reducing their taxable income to below the threshold of £125,140. For example, business owners may wish to consider making pension contributions or reviewing any available tax-efficient employment benefits.
Get in touch
If you would like to discuss your or your clients’ circumstances in more detail, and how today’s announcements might impact you, please do not hesitate to get in touch.
