As expected, the Chancellor did not make changes to the rates of income tax, national insurance, inheritance tax or capital gains tax (CGT), but what he did do is freeze the threshold on each one of these except CGT, meaning the rates everyone is paying today will be the same rates that will apply after April next year. However, whilst these remain the same, the chancellor is relying on a concept known as ‘fiscal drag’ to raise the level of tax taken from all these levies.
This concept means that as wages increase (the current ONS estimates for wage growth being 5.5% to July 2022), taxpayers are dragged into a new, higher tax band. It is this impact that then generates increases in the tax revenue for the government. This apparent ‘tax magic’ allows the government to state that they have not increased the rates of tax, which was their manifesto pledge, whilst increasing the tax take and plugging an element of the ‘black hole’ left after the ‘mini budget.’
Alongside the above, the Chancellor, again as widely trailed before today, reduced the additional tax rate threshold so that it starts where the personal allowances are fully removed from a taxpayer, at £125,140. This means that the tax rates for individuals run from 20%, once you exceed the personal allowance, to 40% on amounts above £50,270, increasing to an effective 60% rate on amounts between £100,000 to £125,140, before dropping back to 45% on all earnings above this level.
The full impact of the tax increases, except for those earning over £125,140 who could be £1,243 worse off, will not be felt immediately, but over time as their wages increase.
Many people use the dividend allowance, which is currently set at £2,000 to shelter small amounts of income they receive. Here though, the Chancellor halved the allowance to £1,000 (from April 23), before halving it again to just £500 from April 2024. This will have an effect on business owners who draw an element of their remuneration in the form of dividends. However, undoubtedly its greatest impact will be on those taxpayers who, having just received a modest uplift in their income following the increase in interest rates etc., will see their investment income cut by this change. Furthermore, there will be an increase in the number of taxpayers having to complete a tax return because their dividend income exceeds the new lower thresholds. It seems unlikely that this is what HMRC would have wanted, especially when they have spent time trying to remove people from the self-assessment system over the past few years.
For many business owners deciding how to remunerate themselves has been the source of much debate. Business owners normally rely on two elements in relation to their remuneration, normally a salary to at least recognise their status within the business, and a larger return on their investment in the business, normally in the form of a dividend. As corporation tax rates change, there will be some who will look to change this mix, seeking the larger corporate tax relief, and reducing the overall cost of their remuneration package. However, remuneration planning should come with a health warning, because tax law, supported by case law, does not simply allow the taxpayer to swap between these two elements as the rates move. The position is much more complex and increasing your salary significantly now because this is what the rates suggest is the ‘lowest’ tax option, will likely mean the salary will need to stay at that higher rate into the future, no matter what happens to rate.
There is an old adage, ‘never let the tax tail wag the dog’, this has never been so true. In all circumstances where you are looking to review your remuneration, you should take advice from a tax professional.
However, it was CGT where the Chancellor decided to take the hatchet, reducing the annual allowance from £12,300 to just £6,000 from April 2023, and falling to £3,000 from April 2024. The unprecedented reduction in this allowance will impact those with modest gains where no tax, and no reporting, was required. The reduction in the allowance could see an additional £2,604 of tax due by individuals selling property from April 2024, as well as the requirement to report small gains to HMRC within 60 days of a property sale. However, once again, it may be the untended consequence of this change that will see taxpayers’ investment value impacted. Previously, taxpayers would make use of this allowance to rebase shares, adding them into their ISA portfolio, reducing the eventual CGT gain on the portfolio, but this will be much more restrictive, building larger gains in portfolios for when they are eventually sold.
For personal tax clients, there will undoubtedly be some pain, we were forewarned about this, but unfortunately, there is more to come as the country looks to build a sustainable financial future.