Autumn Statement 2022

What did the chancellor say?

In his speech, Jeremy Hunt made the following statements regarding income tax.

• “…We have not raised headline rates of taxation…”
  
  
• “I am maintaining at current levels the income tax personal allowance, higher rate threshold… for a further two years taking us to April 2028.”
  
  
• The first difficult decision I take on tax is to reduce the threshold at which the 45p rate becomes payable from £150,000 to £125,140. Those earning £150,000 or more will pay just over £1,200 more in tax every year.”
  
  
• The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024.

What does this mean for the planner?

Firstly, these income tax rates remain in place for 2023/24.

• Starting rate 0%
  
  
• Basic rate 20%
  
  
• Higher rate 40%
  
  
• Additional rate 45%

We also know that the Personal Allowance and higher rate threshold of £12,570 and £50,270 respectively will remain at these levels until 5 April 2028. You may remember that Spring Budget 2021 originally froze these amounts through to 5 April 2026.

What about the 45% Additional Rate above £150,000? We now know that’s falling to £125,140.That figure of £125,140 arises as follows.

The income limit for full personal allowance is £100,000 based on ‘adjusted net income’ which is broadly net income (before personal allowance) less gross gift aid and gross relief at source pension contributions. The basic personal allowance is restricted for those where adjusted net income exceeds £100,000. The personal allowance is reduced by half of the amount - £1 for every £2 - over the £100,000 limit. If income is large enough, the personal allowance will be reduced to nil. That means individuals with adjusted net income of £125,140 will have their personal allowance reduced to £Nil. The effective tax rate for adjusted net income between £100,000 and £125,140 is 60%. Therefore, at a high level, the tax system will now comprise 20%, then 40%, then 60%, then 45%!

Those clients in the £100,000 plus ‘zone’ will be carefully considering the merits of pension contributions to reduce their adjusted net income.

Incidentally, where the government state those earning £150,000 or more will pay just over £1,200 more in tax every year, that figure comprises 5% of £150,000 less £125,140.

With regard to the dividend allowance (or more correctly a dividend nil rate) then the reduction to £1,000 effective from 6 April 2023 and then £500 from 6 April 2024 will be a blow. This is exacerbated by fact that the 1.25% dividend tax increases for 2022/23 are to be maintained in 2023/24

• Dividends in basic rate 7.5% + 1.25% = 8.75%
  
  
• Dividends in higher rate 32.5% + 1.25% = 33.75%
  
  
• Dividends in additional rate = 38.1% + 1.25% = 39.35%

Clearly company shareholders are impacted by this but in addition so will investors holding equity OEIC funds directly. Remember that in contrast to a bond which is a non-income producing investment, OEICs must distribute income. If an investor owns accumulation units, then income will not be distributed but instead reinvested and added to capital. The distribution however remains income for income tax purposes. These OEIC holders will potentially also be impacted by the reduction in the CGT Annual Exempt Amount and the reduction in the 45% tax threshold. In contrast, with regard to insurance bonds it should be noted that for both UK and offshore life funds, dividends received will be exempt from tax. Despite that, investors in UK bonds enjoy a 20% tax credit although the effective rate of tax within the fund will be lower than that.

For those investors who do not need the income being generated by OEIC funds, then perhaps the pendulum is now swinging towards bonds.

What did the chancellor say?

Within his speech the chancellor made the following two statements

• “I am maintaining at current levels the income tax personal allowance, higher rate threshold, main national insurance thresholds and the inheritance tax thresholds for a further two years taking us to April 2028.”
  
  
• “While I have decided to freeze the Employers NICs threshold until April 2028, we will retain the Employment Allowance at its new, higher level of £5,000. 40% of all businesses will still pay no NICs at all.”

What does this mean for the planner?

National insurance has been on a turbulent journey this year with in year adjustments to the primary threshold and also a change to the rates that applied. From 6 April 2023 the Primary Threshold, Lower Profits Threshold and the Lower Profits Limit will all be aligned with the Personal Allowance at £12,570.

As had been previously announced the rates for National Insurance will drop back to their 2021/22 levels. This was 12% for employees earning between the Primary Threshold and Upper Earnings Limit (£50,270) and 2% on all earnings about the Upper Earnings Limit. For employers, any income above the Secondary Threshold of £9,100 can be subject to National Insurance at a rate of 13.8%. However, employers whose total National Insurance “bill” is below £5,000 will have no NI to pay thanks to the Employment Allowance.

This slight increase of the Primary Threshold from its effective rate of £11,908 for the 2022/23 tax year coupled with the reduction in the effective rates of National Insurance will provide a modest increase to take home pay. As an example an individual earning £20,000 per annum would see an increase in their take home pay of £138.51 over the course of the year.

Whilst the overall National Insurance being paid will reduce, it’s always worth considering a salary sacrifice arrangement. Even after this reduction, sacrifice can produce valuable savings for clients. Salary Sacrifice can take place for allowable reasons, such a pension contribution. This National Insurance saving (along with any National Insurance saving passed on by the employer) can get clients a lot more bang for their pension buck.

What did the chancellor say?

The chancellor announced that the Capital Gains Tax Annual Exempt Amount will reduce from its current level of £12,300 to £6,000 from April 2023 and to £3,000 from April 2024.

What does this mean for the planner?

The Annual Exempt Amount (AEA) is a valuable exemption for the financial planner. The initial reduction in the AEA to £6,000 is a significant decrease and will impact those client’s invested in OEICs, shares or property. The further reduction to £3,000 in 2024 means it will bring it to just under 25% of its current level.

The AEA is commonly used by planners to bed and ISA an OEIC portfolio. With an AEA of £12,300, withdrawing £20,000 from an OEIC portfolio to fund a client’s ISA without triggering a tax charge is usually relatively straightforward. When this reduces to £6,000 and then £3,000 more care will be required to avoid paying CGT on these disposals.

Rebalancing portfolios while restricting capital gains to the annual exempt amount will become more challenging, especially for larger portfolios. For a portfolio of £120,000 it will only take capital gains of 5% to use up their AEA in 2023/24 and 2.5% from 2024/25. This will not be an issue for those holding single company multi asset funds as these are rebalanced by the manager not the individual.

The announced changes will also impact trustee investments. Trustees are entitled to an annual exempt amount of half that available to individuals. So while currently trustees have an AEA of £6,150, going forward this will reduce to £3,000 in 2023/24 and £1,500 in 2024/25. And remember, where the settlor of a trust has set up more than one trust the AEA is split between subject to a minimum of 1/5 per trust. This means for settlors of multiple trusts, those trusts could ultimately end up with an AEA of as little as £300 each year. The changes could easily cause a tax increase for those trustees holding an OEIC portfolio or similar investments. Claiming holdover relief on transfers out of the trust should not be overlooked in order to minimise the CGT payable.

For individuals and trustees who are going to end up paying more CGT under the new regime it is perhaps worth considering other investments which are not subject to CGT. Investment bonds for example provide more flexibility around when gains arise and who they are assessed against.

Owners of rental properties will be affected however its unlikely having to pay a bit more CGT will deter this type of investor. The incentive for investing in property tends to be an attractive longer term income yield which is unaffected by the CGT changes, but may be impacted by some of the wider changes announced. Some investors look to make large capital gains by renovating and reselling the property but in these cases they will generally only benefit from the use of one year’s AEA on disposal anyway so the reduction should have little impact on their overall return.

No changes have been made to the CGT rates which remain at 10% for individuals where the gain falls within the basic rate band or 20% if the gain is in the higher or additional rate bands (the rates are 18% or 28% for gains relating to residential property). Loss relief remains as does the CGT uplift on death. Trustees will continue to pay the higher rate of 20% or, 28% for gains from residential property.

What did the chancellor say?

The Chancellor announced that he is maintaining the inheritance tax thresholds at the current levels for a further two years taking us to April 2028.

What does this mean for the planner?

The nil-rate band (NRB) will continue at £325,000, the residence nil-rate band (RNRB) will remain at £175,000, and the residence NRB taper threshold continues at £2 million. This means a single person maximising the NRBs can pass on up to £500,000 with no inheritance tax liability while a married couple or those in a civil partnership can pass on up to £1 million without an inheritance tax liability.

The NRB has remained at £325k for an individual since the 2009/10 tax year. In that year the government received a relatively small amount of £2.3 billion from IHT. However, if you contrast that with the fact that receipts for a 6 month period this year (April 2022 to September 2022) were £3.5 billion it’s clear to see the impact the long-term freezing of NRBs is having on IHT receipts. And that’s also taking into account the introduction of the RNRB in 2017/18 which started at £100k and increased by £25k in the subsequent years until reaching its current level in 2020/21.

The “big freeze “ is going to take longer to melt and this should act as a call to action for clients looking to address their IHT liability to seek financial advice sooner rather than later. 

While the NRBs remain at the same level, it doesn’t mean the value of individuals’ estates is going to do the same. If no action is taken more people will suffer IHT on their estates and those who currently have an IHT liability are likely to see this rise.

The financial planner has many options to help families pass on more of their wealth from the straightforward and simple to the more complex solutions.

What did the chancellor say?

The Chancellor said “the cost of living crisis is harming not just poor pensioners but all pensioners so because we have taken difficult decisions elsewhere in this statement, I can today announce that we will fulfil our pledge to the country to protect the pensions Triple Lock. So, in April, the state pension will increase in line with inflation, an £870 increase which represents the biggest ever cash increase in the state pension”.

He also confirmed the Government’s review of the state pension age will be published in early 2023.

What does this mean for the planner?

While there was no changes announced in relation to pension taxation rules that would effect private and occupational pension planning, the Chancellor did announce the threshold at which the 45p rate becomes payable is to be reduced from £150,000 to £125,140 in April 2023. This means those earning £150,000 or more will pay just over £1,200 more in tax every year.

The reduction in the additional rate tax threshold does create an opportunity for financial planners to discuss and review pension contribution planning for clients who are already additional rate taxpayers but also those who may now fall into this trap or may do so with a pay rise next year.

For example, if there are plans to make a large contribution before the end of this tax year, perhaps utilising carry forward, then it will be worthwhile reviewing the plans to determine whether the contribution should be delayed to maximise tax relief next year. However, don’t forget that when it comes to carry forward planning it’s a case of “use it or lose it”. Therefore if the client has unused allowance from 2019/20 they will need to sweep it up this year otherwise it will be lost.

What did the chancellor say?

In the Autumn Statement ‘green book’ it was confirmed that…

“…the planned increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go ahead. The Corporation Tax rise in April 2023 will only affect the most profitable companies because of the Small Profits Rate.”

The backdrop to this of course was that Spring Budget 2021 introduced these tax changes only to be cancelled in the September 2022 Mini Budget, only to be reinstated by Jeremy Hunt. So, we are left with the changes originally planned. These changes do not impact the 20% UK bond tax credit because life assurance fund taxation remains as is.

The three-pronged approach to corporation tax in the future is as follows

• Corporation tax will remain at 19% for the Financial Years starting 1 April 2021 and 1 April 2022.
  
  
• From 1 April 2023, the headline (i.e. main) corporation tax rate will be increased to 25% applying to profits over £250,000.
  
  
• A small profits rate (SPR) will also be introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%. The Small Profits Rate will not though apply to close investment holding companies

Companies with profits between £50,000 and £250,000 will pay tax at 25% reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rates as profits increase from £50,000 until the 25% rate kicks in. The marginal relief fraction is 3/200. The end result if you do the sums is that each £1 of profit between £50,000 and £250,000 is taxed at an effective marginal rate of 26.5%.

What does this mean for the planner?

The Government originally stated that approximately 70% of companies (1.4m businesses) will be completely unaffected, and just 10% will pay the full higher rate. For the 30% that are impacted then these looming corporation tax increases will begin to focus minds and might influence behaviours.

Assume a company draws up accounts to 31 December each year. If so, the accounting period 1 January 2022 to 31 December 2022 will be the last one that isn’t impacted by the new regime.

Corporation tax planning may now involve, if possible, accelerating income or gains to accounting periods ending before 1 April 2023 instead of those amounts being taxed under the less favourable Financial Year 2023 regime (see comments below relating to crystallising bond or OEIC gains in certain circumstances). Less beneficial, but still worthy of consideration, would be accelerating income or gains to an accounting period straddling 1 April 2023 so that if, for example the accounting period was 1 January 2023 to 31 December 2023 then at least 90/365 (i.e. 3/12) of the profits would benefit from the current 19% corporation tax regime.

In addition to accelerating income or gains, directors might consider delaying tax allowable expenditure so that it falls under the forthcoming regime.

Regarding corporate owned bonds, a ‘micro entity’ uses historic cost accounting for an insurance bond. The company achieves tax deferral until there is a disposal event such as full surrender, and assuming a gain arises, that profit is taxed at the prevailing corporation tax rates. If it’s a UK bond, then the company enjoys a 20% tax credit which more than wipes out 19% corporation tax currently due on the bond gain. For Historic Cost companies with existing bond investments, consideration may be given to crystallising the gain while the 19% rate applies and reinvesting those proceeds. With regard to existing OEICs, whether “equity or interest funds”, held by a micro entity, gains are taxed at time of disposal (not annually) and so again directors might expedite the disposal of shares in OEIC funds to crystallise the gain while subject to potentially lower corporation tax rates. For non-micro companies, ‘equity funds’ are also taxed on disposal and therefore again the disposal might be brought forward to crystallise the gain at lower corporation tax rates.

These corporation tax changes when added to the frozen allowances, additional rate threshold cut and reduction in the dividend allowance announced today is not good news for business owners' who may revise their remuneration strategies. Pension contributions will be more valuable than they currently are and for those retaining profits within their business consideration may need given to investing the accumulated profits. 

Back to top