Analysing The Autumn Budget
We have now had a month to reflect on the announcements in the Autumn budget. The October 2021 Budget and Spending Review was Rishi Sunak’s second opportunity this year to ‘shape the UK economy’. Unusually many of the Autumn Budget measures were announced in advance, on top of the tax raising that was revealed in the March 2021 Budget.
What we already knew:
- Main allowances, thresholds and exemptions for Income Tax, Capital Gains Tax and Inheritance Tax are frozen until April 2026.
- Lifetime Allowance of £1,073,100 is frozen until 2025/26.
- A temporary 1.25% increase in Class 1 and Class 4 National Insurance Contributions in 2022 to 2023 only to fund the Health and Social Care Levy.
- From April 2023 individuals, including those over the State Pension Age, will pay the new 1.25% Health and Social Care Levy.
- Full Corporation Tax Rate rising to 25% from 1st April 2023.
- The Office of Tax Simplification (OTS) reviews of Capital Gains Tax and Inheritance Tax have been published.
And what the Chancellor told us on budget day:
- The government has provided £378 billion of direct support for the economy over the last year, including supporting 11.7 million jobs.
- The Chancellor has written to the Governor of the Bank of England reaffirming the 2% consumer price inflation target.
- Office of Budget Responsibility (OBR) expects economic growth to be faster than expected; 6.5% this year, 6.0% in 2022, then 2.1% in 2023, and 1.3% in 2024.
- First two Green Gilt issues have raised £26.1 billion, and the first NS&I Green Savings Bond has launched offering a 3-year fixed term at 0.65%.
- Focus on investment in R&D and innovation to deliver a high-wage, high-skilled, high productivity economy.
- Business rates reform has been published and a 50% business rates relief will apply to retail, hospitality and leisure businesses.
- A new ‘business rates improvement relief’ effectively deferring business rates reviews for 12 months after renovations.
- An £11.5 billion Affordable Homes Programme has been launched, with a target of 180,000 affordable houses.
- Low earners will benefit from the proposed correction in the Pensions net pay scheme as they currently do not receive tax relief on contributions.
- Apprenticeships and Lifetime Skills Guarantee received additional funding including a new ‘Multiply’ programme to improve adult numeracy skills.
- Universal Credit taper rate was reduced from 63% to 55%, as well as increasing work allowances, effectively increasing the net retained income.
Having announced the revenue raising prior to the Autumn Budget, the Chancellor was able to focus on spending. The measures show clear emphasis on supporting targeted individuals and businesses through the next phase of the pandemic. The 3 rules for how much you can invest in tax efficient pensions and ISAs remain unaffected, and there are also many incentives to business for capital investment.
The Chancellor committed to reducing taxes by the end of this parliament, although individuals will first need to navigate through the increased cost of living predicted, and higher taxation previously announced.
All our clients, have their own unique set of circumstances and the budget announcements effect different people in different ways. There are many financial planning considerations that have come out of the budget. Below I have highlighted the key considerations:
- The increases to dividend rates and national insurance (NICs) will impact remuneration strategies employed by salaried company directors/shareholders, tipping the scales away from salaried employment and towards dividend remuneration.
•Self-employed clients considering whether or not to incorporate will need to factor the NIC and dividend tax changes into their decision – not forgetting the changes to corporation tax rates due to apply from 1 April 2023.
•The increases in the dividend tax rates will also have an impact for investors who receive dividends totalling more than £2,000, increasing the value of wrappers that shelter profit from an immediate charge to tax.
- The 0% dividend allowance means that, regardless of their tax rates, a married couple or civil partners can receive up to £4,000 of dividend income with no tax liability, provided that they each have sufficient dividend income to utilise their allowance. Utilising this allowance becomes even more important due to the increase in dividend tax.
Capital Gains tax:
- The changes to property disposal rules will be of particular interest to buy to let investors, however this will be a relatively minor change and unlikely to change an investor’s strategy.
- Utilising the available annual CGT exemption is a core part of financial planning for eligible clients. An annual exercise to ensure available allowances and exemptions, including CGT, is being used should be part of the review agenda.
- The impact of inflation means the true value of the annual exemption will be eroded and compound effect of annual use becomes even more important.
- Being aware of the benefits of being able to create an “income” stream from capital disposals to benefit from the lower rates.
- The new Health and Social Care levy will make salary sacrifice more attractive due to the additional National Insurance savings for both employers and employees. The good news is that there were no signs of any further restrictions on salary sacrifice arrangements within the Budget speech or documents.
- The levy will also make employer pension contributions more attractive for shareholding directors looking to extract funds. Employer contributions will now be even more attractive than paying either additional salary or dividends.
- The corporation tax increases from April 2023 will also make pension contributions more favourable than dividend payments.
- The Lifetime Allowance (LTA) is becoming an increasing issue for many savers. The announcement earlier in the year to freeze it coupled with the relative high inflation rates means that many more pension savers are likely to be hit with an LTA charge and charges will be considerably higher than if the LTA had kept pace with inflation.
- Clients who have funds close to or exceeding the LTA may need to review any previous decisions in respect of continuing to fund their pensions and for those who have chosen to defer crystallising their benefits based on the expectation of inflationary increases.
- Individual Protection 16 and Fixed Protection 16 are still available where the client is eligible and can offer a protection LTA of up to £1.25m.
The good news is that all the other benefits of pensions remain. Personal contributions can benefit from income tax relief at the client’s highest marginal rates, employers can benefit from corporation tax relief, the funds grow free of income tax and capital gains tax, 25% tax free cash is still available and most pension funds sit outside of the estate for inheritance tax purposes