The Chancellor, Jeremy Hunt, announced his first Autumn Statement today. Following his predecessor's mini-budget just eight weeks ago, the Chancellor focused on stability and rebuilding the UK's economy.
The Chancellor relied on fiscal drag to boost the tax take, targeting the maintenance of tax thresholds until April 2028. This means, for example, that the Inheritance Tax nil rate band will remain frozen for another six years at £325,000, by which time it will not have changed for 20 years. Similarly, many current non-taxpayers will find themselves paying basic rate tax in the future as personal allowances are reduced. Many more high earners will find themselves paying top rate tax as the 45% threshold is reduced.
Significant announcements mooted ahead of today such as aligning Capital Gains Tax with Income Tax, or changes to the taxation of non-domiciled UK residents, did not come to fruition and have not been proposed in consultation documents. The Spring Budget, usually held in March, will be the time to reflect on whether today's announcements were sufficient to rebuild confidence in the UK's economy.
Below, we comment on what was announced today - and what wasn't. Arguably the latter is more interesting and revealing than the former.
What they announced
- 45% income tax threshold reduced from £150,000 to £125,140. This means those earning between £100,000 and £125,140, who already face an effective 60% marginal tax rate due to the tapered loss of their personal allowance, will move straight to a 45% rate on any income above £125,140.
- Personal allowances frozen at current levels until April 2028. This prime example of "fiscal drag" is likely to raise significant funds but the Government may be hoping many taxpayers won't notice.
- Dividend allowance to reduce from £2,000 to £1,000 in 2023/24 and to £500 in 2024/25.
- Capital Gain Tax (CGT) annual exemption to reduce from £12,300 to £6,000 in 2023/24 and to £3,000 in 2024/25. This is unlikely to be a big revenue raiser, as many people deliberately sell shares each year to generate gains just within the exemption and so will simply realise lower gains.
- Stamp Duty Land Tax (SDLT) cuts announced by Kwasi Kwarteng in September to remain until March 2025. This is likely to help the housing market, which is otherwise expected to decline as the country faces high inflation, a cost of living crisis, increased unemployment and a period of recession. Sale volumes generate useful SDLT revenue for the Government and it's better to maintain some revenue, even if it's at lower rates.
- Inheritance Tax Nil Rate Band frozen to April 2028. Another example of fiscal drag and one that the electorate is familiar with. Younger taxpayers may wonder whether IHT allowances ever increased. The answer is they did, and usually every year, but no longer.
- Business rates. A business rates package was announced following the conclusion to the Government's review of business rates in 2021. Measures include freezing the business rates multiplier for another year (2023-2024) and permanent removal of a downwards cap on business rates reductions, arising as a result of a revaluation.
- Value added tax. The UK VAT registration threshold is to be maintained at £85,000 until 31 March 2026 (currently the threshold is more than twice as high as EU and OECD averages). Reducing this could have been an easy win to spur growth (and collect tax).
- Preventing CGT avoidance. Shareholders with a 5% or greater interest in UK close companies who exchange their shares for shares or debentures in a non-UK close company will be treated as continuing to hold shares in a UK company. Whereas previously they could have relied on the remittance basis (and so only pay UK tax on dividends or gains from the overseas company if remitted to the UK), they will now be taxable whether or not remitted. Affected shareholders who are prepared to pay tax on the gain accruing up to the exchange can effectively opt out of the change as regards future dividends and growth.
What they didn't announce
- No increases to Capital Gains Tax (CGT) rates. This was widely feared, especially by those considering selling a business or a second home or buy to let. Whether CGT increases are off the agenda for the rest of this Parliament remains to be seen but the Government will be weighing up the limited revenue potential of CGT rate increases against the anti-growth message some will think it sends.
- No change to CGT Business Assets Disposal Relief (formerly Entrepreneurs' Relief). This was not a surprise. In 2020, the lifetime allowance was cut from £10 million to £1 million. If BADR were cut further or abolished, and no alternative tax incentives for exiting small and medium sized business owners proposed, this could send an anti-growth and anti-entrepreneur message.
- No change to Inheritance Tax Business Property Relief. The perennial fear that this generous relief would be abolished or restricted proved unfounded, ensuring that one of the most effective shelters against inheritance tax remains.
- No change to Enterprise Investment Schemes (EIS), Enterprise Management Incentives (EMI), Investors Relief or Venture Capital Trusts (VCTs). This was not a surprise for a Government keen to promote entrepreneurial risk-taking and investment in early stage or otherwise risky companies with growth potential via targeted tax incentives.
- No change to SDLT rules on Multiple Dwelling Relief or Mixed Use Properties. Although no changes were announced, HMRC is yet to provide feedback following the consultation on these rules, which closed in February this year.
- No change or announcement on the taxation of non-domiciled residents (non-doms). This is perhaps less expected. The tax status of wealthy non-doms is often in the public eye. While few in number, they are also large earners, employers, spenders and charitable donors. The unquantifiable economic loss if many were to leave the UK won't have gone unnoticed by the Government. In addition, the tax rules for non-doms are already fiendishly complicated, perhaps further diminishing the Government's appetite for making wholesale changes to the regime, which would require significant HMRC and Treasury resource.
- No change to tax relief on pension contributions. There was speculation that the Lifetime Allowance, already frozen at £1.073 million until 2026, could be frozen for longer, or even reduced. This included concerns that the amount people could contribute to their pension and still get tax relief at their highest rate would be limited, or that tax relief would be restricted to the basic rate. Although pensions tax relief is hugely expensive for the Government, such changes would have been unpopular and risked damaging the UK's important pension industry, while also potentially disincentivising pensions savings, which combined could have had worrying long-term consequences.