Just eight weeks after the Emergency Budget announced by former Chancellor Kwasi Kwarteng, Jeremy Hunt delivered an Autumn Statement which was very different in tone to the previous statement. After analysing the measures announced, the Office for Budget Responsibility have forecast the impact of the changes will lead to a drop in living standards of almost 7% over the next two years. The Budget statement contained a number of changes to allowances and tax rates that will impact investors from the start of the next tax year. However, with careful planning, the impact of the Autumn Statement on investors can be minimised.
Additional Rate Income Band adjustment
Perhaps the most striking measure in the Autumn Statement was the reduction in the Higher Rate Band for Income Tax. Currently income earned between £50,270 and £150,000 is taxed at 40%; however, from April 2023, the upper end of this threshold will be reduced to £125,140, and income above this level will be taxed at the Additional Rate of 45%.
Thresholds frozen for a further two years
In addition to the changes to the threshold for the top rate of Income Tax, the Chancellor has frozen the Personal Allowance, Basic and Higher rate thresholds for a further two years than had previously been announced. These thresholds will now be frozen until April 2028, and the so-called “fiscal drag” caused by the freeze will generate additional tax for the Exchequer as income increases over time.
As more individuals are subject to the Higher and Additional rates of Income Tax, this increases the opportunity for individuals to reduce their tax burden through financial planning. By making personal pension contributions, an individual can obtain tax relief at their marginal rate, and Venture Capital Trusts, which provide Income Tax relief of 30% on qualifying investments in new shares, can also reduce an individual’s tax liability.
The rules surrounding pension contributions can be complex, and Venture Capital Trusts are higher risk investments and only suitable for investors with an appropriate appetite for investment risk. For this reason, we strongly recommend investors take independent advice on the best way to proceed.
State Pension increase confirmed
As covered in last week’s Wealth Matters, there had been speculation that the State Pension “triple lock” could have been under threat, given the elevated levels of inflation, and the impact this may have on public finances. The Chancellor announced the “triple lock” remains in place, and that State Pensions will increase by 10.1% from April 2023.
It is important to remember that the State Pension takes up the first part of an pensioner’s Personal Allowance, and the increase from April, whilst welcome, may mean that a greater proportion of personal pension, rental or investment income will be subject to basic rate Income Tax. It would be sensible for pensioners with additional income sources to review the tax efficiency of investments and ensure that allowances, such as the Marriage Allowance, are used where appropriate.
Dividend Allowance cut
The Dividend Allowance, which shelters dividends from shares and business profits from tax, will be reduced from £2,000 to £1,000 from 6th April 2023. When the Dividend Allowance was first introduced in April 2016, it was worth £5,000 and fully covered the dividends generated by shareholdings for many investors. The reduction from April will likely mean more shareholders will be liable to tax on dividends, and an even greater number will be liable to tax from April 2024, when the Dividend Allowance will be halved again to £500.
Capital Gains Tax allowances reduced
Changes to the Capital Gains Tax (CGT) thresholds and rates have been mooted for some time. Whilst the Autumn Statement left the current CGT rates unchanged, the CGT allowance – which is the amount of gain an individual can make on the disposal of assets before CGT becomes payable – will fall from the current £12,300 to £6,000 from April 2023. As with the Dividend Allowance, the Chancellor has gone further and will halve the CGT allowance again, to just £3,000, from April 2024.
This is likely to have a significant impact on investors who are selling assets such as shares and investments, and rental or second properties. As a result, investors may wish to revisit existing portfolios and make sure that the current CGT allowance is used to its’ fullest extent. Furthermore, if an investor makes a net capital loss over a tax year, this loss can be carried forward to offset against gains made in future tax years. This is called an “allowable loss” and can be claimed up to 4 years after the end of the tax year in which the asset was disposed. Given the reduced annual allowances, it will become even more important to report allowable losses to HMRC.
Making use of the ISA allowance
As a result of the reduction of the Dividend Allowance and Capital Gains Tax annual allowance, we feel it is now more important than ever to make use of the annual Individual Savings Allowance (ISA). All income earned within an ISA is exempt from Income Tax, and sheltering Equity investments within an ISA will ensure tax efficiency is maintained, despite the reduction in the Dividend Allowance. Furthermore, all gains made within an ISA are exempt from Capital Gains Tax, and again this renders the ISA even more valuable given the reduction in the Capital Gains Tax allowance over the next two tax years.
The ISA allowance remains unchanged at £20,000 for the 2023/24 Tax Year, and using the available allowance consistently each tax year remains an important way of ensuring investments remain tax efficient.
The Autumn Statement introduced a number of measures designed to raise additional tax and as a result, investors could end up paying more tax on dividend income and capital gains from 6th April 2023. However, with careful financial planning, individuals can reduce the impact of the changes to thresholds and allowances on their personal finances. Speak to one of our experienced advisers to discuss how careful financial planning can maximise tax efficiency of your investments in the current and future tax years.
If you are interested in discussing the above further, please speak to one of our experienced advisers here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.