No respite for millions facing tax rises
Chancellor Jeremy Hunt announced a range of Budget reforms to benefit higher-earning pension savers, but left untouched tax increases which will impact millions of workers as UK price rises persist.
In changes announced in November, thresholds and allowances on income tax, national insurance and inheritance tax have been frozen until 2028 and the tax-free allowances on capital gains and dividends will be halved next month and again the following year.
Government documents showed these decisions on personal taxes would raise even more than estimated in November, the consequence of “fiscal drag” pulling more Britons into higher tax brackets.
The thresholds for income tax have been frozen since 2021 and will remain frozen despite self-assessed income tax receipts jumping by a third year-on-year in January to £21.9bn, boosted by inflation and high employment numbers.
Partly offsetting the loosening of the pension rules, the threshold at which the highest earners pay the 45p income tax rate will fall from £150,000 to £125,140 from April 2023.
Forecasts by the Office for Budget Responsibility estimate this will raise £3.8bn cumulatively over the next five years, up from a previous estimation in November of £3.6bn.
“Under this change, the 629,000 people already in the higher rate bracket will pay just under £1,250 more in tax,” said Shaun Moore, tax and financial planning expert at Quilter.
Those earning between £100,000 and £125,140 will continue to pay a marginal tax rate of 60 per cent because the personal allowance tapers down.
Investors are also bracing for the £12,570 capital gains tax-free allowance to fall to £6,000 next month, a move that will draw an extra 250,000 taxpayers into the CGT net, according to the Chartered Institute of Taxation. The allowance will then be cut again in 2024 to £3,000.
The exemption reduction means that from April 2024, those liable for CGT will pay up to £2,604 more than they do currently, according to Nimesh Shah, chief executive at tax adviser Blick Rothenberg.
The shrunken CGT-free allowance is poised to raise a cumulative £1.84bn to 2027-28, up from a previous forecast of £1.6bn.
Those who receive income via dividends — including small business owners and entrepreneurs as well as investors — will see their tax-free allowance squeezed, too. The dividend allowance drops from £2,000 to £1,000 in the new tax year, then to £500 from April 2024.
Cutting the dividend tax allowance to £1,000 will cost a basic rate taxpayer £87.50, a higher rate taxpayer £337.50, and an additional rate taxpayer £393.50 next year. Halving it again from April 2024 means it will fall to one-tenth of the £5,000 allowance when it was introduced in 2016.
The slashing of the dividend tax allowance is forecast to raise £3.08bn in the five years to 2027-28.
The inheritance tax threshold, which has been at £325,000 since 2009, will also be held at this level until 2028. Tax receipts from inheritance tax have risen from £2.3bn in 2009 to £6bn in 2021 as property prices have rocketed, while the threshold has stayed the same.
But as pensions are normally outside the scope of inheritance tax, scrapping the lifetime allowance will significantly increase the amount that can be passed on through pensions without additional tax charges.
“We will see more and more people using pensions for inheritance tax planning and in retirement, taking money from Isas and other investments which are subject to inheritance tax before accessing their pensions,” said Sean McCann, chartered financial planner at NFU Mutual.