That “everyone” will be paying more tax after the autumn statement was the big spoiler from Jeremy Hunt before the event and so it came to pass, with a programme of tax creepage that was short on good news amid a cost of living crisis.
So what’s happening with income tax?
After the market mayhem caused by Kwasi Kwarteng’s junked mini-budget tax cuts, Hunt is a chancellor in “stealth” mode, with measures such as freezing tax thresholds to up the tax take.
In the 2021 spring budget, the then chancellor, Rishi Sunak, set up a four-year freeze on personal tax thresholds that began in April of this year. Over time, this drags more low-income households into paying basic rate tax (which kicks in at £12,570) and those with earnings nearing £50,000 into the higher 40% rate. Now Hunt has gone even further, by prolonging this deep freeze for a further two years, meaning no change in thresholds until 2028.
As expected, Hunt left the three main tax rates unchanged – 20p basic, 40p higher and 45p additional rate – with the first £12,570 of income tax-free and the 40% rate starting at £50,270.
He did, however, lower the £150,000 threshold at which Britons start paying the 45p top rate of income tax to £125,140 – a measure that will pull 250,000 people into the top rate. For someone making £150,000, the change means they will pay an additional £1,243 in income tax a year. (Note, Scotland’s income tax rates and thresholds are set by the Scottish parliament.)
Freezing allowances results in what economist call “fiscal drag”, a term that describes the stealthy process of dragging more Britons into paying income tax and pushing others into paying a higher rate.
It is a lucrative measure in the current climate as wages rise in response to soaring inflation. When the four-year freeze was announced in 2021, the Treasury expected the plan to raise £8bn a year by 2026. But with inflation at a 41-year high the Institute for Fiscal Studies (IFS) now thinks that figure will be a whopping £30bn a year by 2026.
At an individual level, if a person is making £51,000 and receives an annual pay rise of 3%, without adjusting personal allowances and thresholds to take account of inflation they will have paid an additional £8,632 in income tax after the six years, with their annual tax bill rising from £8,444 this year to £11,791 in the 2027-28 tax year, according to the advisory firm Blick Rothenberg.
Fiscal drag also has implications for child benefit. The £50,000 threshold, at which point higher earners start having child benefit clawed back, has remained unchanged since the measure was introduced in 2013, meaning more parents are having to pay some of it back.
Families lose a proportion of their child benefit, currently worth £21.80 a week for the first child and £14.45 a week for additional children, where either parent makes between £50,000 and £60,000. This is known as the “high-income child benefit tax charge”. It is tapered, so the more you make over £50,000 a year, the more you need to pay back until you get to £60,000 and over, when you have to pay it all back. If you move into the sights of this charge you need to fill in a self-assessment tax return.
Remind me: what’s happening with national insurance?
This year’s national insurance Hokey Cokey has been a big headache for payroll departments around the country. However, one of the few decisions taken by Kwarteng that still stands is his reversal of April’s national insurance rise.
In 2021, Boris Johnson’s government decreed that NICs would go up by 1.25p in the pound in April this year to better fund the NHS and social care. Ministers agreed to push up the main rate of NICs for employees from 12% to 13.25%, while employers were told to pay 15.05%.
However, Liz Truss’s shortlived government scrapped that increase, with the NI rate dropping back to 12% on 6 November. It is paid at this rate by employees paid between £12,570 and just over £50,000 a year. Above that level, the rate has gone back down from 3.25% to 2%. Most employees will start to receive the cut in this month’s pay, though some workers may have to wait until December or January.
This about-face, combined with the summer decision to increase the threshold at which the tax kicks in (from £9,880 to £12,570 a year), means the average worker’s NIC bill has come down by about £500.
Are they coming for my inheritance?
Inheritance tax is an emotive topic. It is paid at 40% on estates worth more than £325,000 for an individual and £650,000 for a couple. This increases by £175,000 each person to a maximum tax-free amount of £1m for a couple if a home is given to children or grandchildren. The government extended a freeze on these rates by another two years to 2028 so more people will have to pay it. This is particularly significant for families dealing with estates in London and the south-east, where house prices are the highest in the country.
And what about capital gains tax?
Capital gains tax is charged on the sale of assets such as shares and second homes. Higher-rate taxpayers pay 20% on profits from shares and securities and 28% on residential property – above an annual tax-free allowance of £12,300. Hunt has cut next year’s allowance to £6,000, which means anyone paying the top rate will pay an additional £1,764 of tax. This allowance will be slashed again to £3,000 in April 2024, which means an extra £2,604 compared with the status quo.
Were there any winners?
The 2 million workers on the national minimum wage got what Hunt billed as their “biggest ever” pay rise. It is now £9.50 an hour for adults aged 23 and over and this will jump by nearly 10% to £10.42 in April next year, an increase that represents an annual pay rise worth more than £1,600 to a full-time worker.
However, with the UK’s annual inflation rate at 11.1%, this will not be enough to prevent a fall in living standards. The retail trade union Usdaw had called for the minimum wage to be lifted to “at least £12 an hour”. Its general secretary, Paddy Lillis, said it had “called for a meaningful package of support for working people” but the chancellor had delivered a “real-terms minimum wage cut”.
There was also some good news for pensioners struggling with rising living costs. Under the so called “triple lock”, the state pension is supposed to increase each year in line with whichever of these three measures is highest: inflation, as measured by the consumer prices index, the average increase in wages across the UK or 2.5%.
There were fears the Conservatives would back away from this expensive pledge but the chancellor confirmed that next April the state pension will rise in line with September’s inflation rate of 10.1%.
This means pensioners on the basic state pension will get £156.20 a week from April 2023, up from £141.85, and those on the new state pension will get £203.85, up from £185.15. For the latter this works out at an annual increase of £972, taking their total income to £10,600.
He also increased pension credit (the top-up payment made to country’s poorest pensioners) by 10.1%, an increase worth up to £1,470 for a couple and £960 for a single pensioner.
Hunt also confirmed that means-tested benefits, including universal credit, would rise in line with the September inflation figure from next April. The move would mean that 10 million working-age families got a “much-needed increase”, with the an average family on universal credit £600 better off. Hunt also increased the benefit cap in line with inflation.
I run my own company – how did the budget affect me?
Many small business owners frequently pay themselves using dividends from their company profits as this is usually more tax-efficient. Like other share-owners they can receive up to £2,000 in dividends a year before paying dividend tax at three levels: 8.75% for basic-rate taxpayers, 33.75% for higher-rate and 39.35% for additional-rate.
Hunt kept the rates the same but halved next year’s exempt allowance to £1,000 and is pruning it further to £500 in 2024.
This is also bad news for small investors who supplement their income by investing in the stock market. A basic-rate taxpayer will have to hand over another £87.50 next year and £131.25 the year after.
What about help with the cost of living crisis?
This year’s package of government support handed energy billpayers a £400 grant, while 8 million households on means-tested benefits received a cost of living payment worth £650, with an additional £150 and £300 available for disabled individuals and pensioners.
Hunt said the government’s energy price guarantee (EPG), which is capping typical energy bills at £2,500 this winter, will continue to provide support from April 2023, when the cap will rise to £3,000. With energy prices forecast to remain elevated throughout next year, Hunt said this would save households £500 each on energy costs.
There will be no universal bill support next year, with the new cost-of-living package targeted at pensioners and low-income households. Those on means-tested benefits will get £900, pensioners will receive £300 and those on disability benefit will get £150 in the financial year beginning April 2023.
What are experts saying about the changes?
This budget was short on good news for Britons struggling with higher food, energy and borrowing costs. The chancellor is also making it easier to raise council tax by 5% in an attempt to bolster councils’ finances, which will add to the squeeze on household budgets next year.
Genevieve Morris, the head of corporate tax at Blick Rothenberg, described it as a budget that “boils the frog”. “The continued freezing of tax thresholds means most people won’t notice it directly as the temperature increases, and so won’t leap out of the water. They’ll simply discover years down the line that they boiled.”
Paula Bejarano, an associate economist at the National Institute of Economic and Social Research, said the chancellor had announced an “effective tax rise for all”. “Given that the latest ONS data indicates that real wages fell by 2.6% on the year, we had hoped the chancellor would not implement this policy in the lower thresholds – as it will further squeeze budgets that are already at capacity due to the cost of living crisis.”
Did Hunt pull any rabbits out of the hat?
It would appear the Treasury can’t afford to keep rabbits any more …
• This article was amended on 18 November 2022. The first £12,570 of income is tax-free, not £12,750 as an earlier version said. Basic-rate taxpayers who invest in the stock market will pay an extra £131.25 the year after next, not £175. And the new weekly pension figures for those on the basic state pension have been added to the text.