How the Autumn Statement 2022 affects your tax plan

The Autumn Statement 2022 brought in some of the most significant tax increases seen in a generation. Few areas were left completely unaffected by the changes, which means that most people will see a day-to-day impact over the next few years.

In this guide, we look at the main changes to the tax landscape, what this means for you, and what you can do about it.

Income

Not only did the current chancellor completely U-turn on abolishing the 45% tax rate, he announced a reduction to the threshold at which it becomes payable from £150,000 to £125,140 from April 2023. This means that if you earn £150,000, you will pay an additional £1,243 in income tax.

Anyone earning over £100,000 already starts to lose their personal tax-free allowance at a rate of £1 for every £2 earned over the threshold. The new additional rate tax threshold of £125,140 is the point at which the personal allowance is eroded completely. Earners in this tax band will now face an additional tax burden.

While the basic and higher rate thresholds were left intact, they are due to be frozen until 2028 instead of 2026. This means that assuming earnings continue to rise, more people will be pushed into a higher tax band. High inflation means that the cost of living could overtake wage rises, so between this and a real-terms tax increase, household budgets will become tighter.

There are a few options to reduce taxes on your salary, for example:

• Pay into a pension. Personal pension contributions offer tax relief, but if you contribute to a workplace scheme through salary sacrifice, you may also benefit from a reduction in your National Insurance contributions.
• Married couples can share some of their tax-free personal allowance. If you are a basic rate taxpayer, you can claim up to £1,260 of your spouse’s personal allowance if they don’t have the income to use it themselves. This could save up to £252 per year.
• Claim tax-free childcare. If you earn under £100,000, you can receive relief on your childcare costs of up to £2,000 per year.

Investments

When you sell investments and make a gain, you are subject to capital gains tax (CGT) on any profits you make over and above the annual exemption. This is currently £12,300, but is reducing to £6,000 from April 2023, and to £3,000 from April 2024. This means that you will probably pay more tax if you sell your investments or switch funds from next year onwards.

Additionally, the dividend allowance will reduce from £2,000 to £1,000 in April 2023, and to £500 in 2024. This will reduce the amount of tax-free income you can earn from your investments.

However, you still have a number of options for tax-free investing:

• You can invest up to £20,000 per year in an ISA to benefit from tax-free income and growth. You can even move existing investments into your ISA, subject to the annual limit.
• Pensions are also free of CGT, although you need to bear in mind that you can’t access the money until age 55 (increasing to 57).
• Investment bonds are exempt from CGT, although any gains are assessed for income tax. With careful planning, using an investment bond can help to reduce your tax liability.
• Some higher risk investments are exempt from CGT, or even allow you to shelter gains you have already made on other investments. These options aren’t suitable for everyone and advice is recommended.

Business

Company directors will already be disappointed at the decision to continue with the planned increase to corporation tax. However the decision to reduce the tax-free dividend allowance will place a higher tax burden on business owners.

It’s a good idea to seek tax advice about the best way to structure your income. A combination of dividends, salary, and even reclaiming money that you have loaned to the company could give you more tax efficiency.

You can also make pension contributions from the business, which are usually an allowable expense for corporation tax purposes. Certain types of insurance policy (such as relevant life plans) allow you to set up life cover paid for by the company.

If your spouse works in the business, you can double up on the reliefs, exemptions, and allowable expenses.

Of course, any expenses claimed must be reasonable, and wholly and exclusively for business purposes. Tax advice can help to maximise the benefits while staying on the right side of HMRC.

Property

If you are looking to buy a property, you could still benefit from the increased stamp duty threshold. This will be maintained at £250,000, having recently increased from £125,000.

However, it has been announced that this will be temporary, reverting back to £125,000 from March 2025. This is intended to support the property market through the recession.

You may wish to buy sooner rather than later, although it’s possible that prices will be inflated in the short term as more people seek to benefit from the reduction.

Inheritance Tax (IHT) and Trusts

It is no surprise that the nil rate band is remaining at £325,000, having been frozen for over a decade. Extending this to 2028 will take the freeze to almost 20 years.

There are a number of options for reducing IHT, including wills, trusts, and making gifts.

Trusts are limited by the nil rate band, as there are tax consequences for some types of trust where the value is over £325,000. The freeze to the nil rate band will continue to constrain the options for tax planning on large estates.

Trusts also face higher potential CGT bills, as the annual exemption will be cut in line with the personal exemption. This will reduce from £6,150 to £3,000 in 2023 and £1,500 from 2024 (half the personal exemption). If you have set up multiple trusts, the exemption will be split between them, in some cases making it almost worthless.

Many trusts hold investment bonds which can help to keep the tax liability under control. This will probably be an even more attractive option when the exemptions are cut.

Other than trusts, there are a few other options to reduce your IHT liability, including investing in companies which qualify for business relief. This is a high risk strategy, but can offer significant tax benefits.

You can also set up an insurance policy to pay the tax. This doesn’t reduce the tax bill, but it can simplify the process and protect your estate.

It is likely that we will all pay a bit more tax over the next few years, but the foundations of a sensible tax plan have not changed – use your allowances and exemptions, invest tax-efficiently, and avoid triggering tax penalties where possible.

For further information or advice please contact one of our Wealth Managers or call us on 01395 207350.