NEWS & VIEWS
There were a number of personal tax changes announced in the Autumn Budget today. These could potentially have a significant effect on our clients and the Business Analysis team is on hand to discuss any issues or queries that arise as a result of today’s announcements.
Below is a summary of the headline announcements affecting our clients and our first impressions:
Key investment tax changes
- The capital gains tax (CGT) annual exemption has been reduced from £12,300 to £6,000 in 2023/24, and will be reduced to £3,000 in 2024/25.
- The threshold above which the 45% additional rate of income tax is paid will be reduced from £150,000 to £125,140 from 2023/24.
- The dividend allowance will be cut from £2,000 to £1,000 in 2023/24, and will be reduced to £500 from 2024/25.
There were other significant announcements, such as the freezing of national insurance thresholds and inheritance tax thresholds, but we will focus on the changes to direct taxes on investments.
Annual exemption amount
The annual exemption for capital gains tax is currently £12,300 for the year ending 5 April 2023. The Chancellor announced that it would be reduced to £6,000 for the 2023/24 tax year, and to £3,000 for the year after. This will bring many more investors into the scope of tax.
It is well known that the median net gains per tax year for individuals roughly tracks the level of the annual exemption. In other words, the typical taxpayer who sells assets only sells enough to come within the annual exemption. As HMRC noted in their statistical commentary for 2020/21, one-third of CGT taxpayers have gains under £25,000 – though remember that this only covers gains reported to HMRC under self-assessment.
By more than halving the annual exemption, those individuals will either have to make more disposals to achieve the same level of cashflow per year, will seek alternative ways of achieving that cashflow, or will simply cut back. With rising inflation and interest rates, it seems unlikely that the third option will be the most common choice of those affected individuals.
The Office of Tax Simplification (OTS) projection in their first CGT simplification report was that reducing the annual exemption to £6,000 for 2021/22 would bring approximately 234,000 new taxpayers into the scope of CGT. With rising inflation, one would assume that the real number for 2023/24 will be higher.
Given that more individuals may be brought into the scope of CGT, tax-efficient investments such as ISAs, EIS/SEIS/VCT shares and perhaps even pensions may look more inviting to investors. The ISA investment limit has been frozen at £20,000, however the SEIS investment limit was raised to £250,000 per individual as part of the Mini-Budget and was one of the few policies which survived the change in Chancellor.
Additional rate income tax
The additional rate of income tax is 45% and is currently charged on income above the higher rate threshold of £150,000. The Chancellor announced that the threshold at which income becomes charged at 45% will be reduced to £125,140.
The personal allowance of £12,570 is abated at £1 for every £2 of adjusted net income above £100,000, which means that your personal allowance is zero when your adjusted net income is £125,140 or higher.
Income above £125,140 will be taxed at 45%. This is estimated to bring approximately a quarter of a million taxpayers into the 45% tax bracket. Individuals with income above £100,000 will see a marginal tax rate of 60% on their income up to £125,140, and then individuals with income above that will have a marginal income tax rate of 45%.
Dividend allowance cut
The dividend allowance is £2,000 and is available to all taxpayers for the year ending 5 April 2023. It will be cut to £1,000 in 2023/24 and cut again to £500 from 2024/25.
For those investors with significant investment income already, this will not prove a hardship. For those investors for whom the dividend allowance is an important part of their investment strategy, this change will be more difficult.
Dividends are profits made by the companies which are distributed to investors. The investor does not control the level of dividend paid by the company so, in seeking to maintain a similar cashflow, cannot simply rely on higher dividend payments to overcome the higher tax liability. One consequence may be that some companies who typically pay dividends around April will attempt to pay them slightly earlier in order to ensure investors keep more of it! For investors themselves, it will be interesting to see any change of investment strategy they may make.