UK Autumn Statement Review
After the ‘Mini-Budget / Maximum Impact’ Statement of 23 September, presented by the ill-fated Truss / Kwarteng administration, Chancellor of the Month Jeremy Hunt had few options today, other than to deliver a statement that would satisfy global markets, reassure inward investors to the UK, and bring the prospect of a period of financial stability. No pressure, then! Realistically, could he achieve that whilst still ticking many of the boxes the UK public required during the current cost of living challenges?
As it turns out…yes and no. It was no surprise that there were no major surprises to unnerve markets (or Conservative MPs), to the same extent that the September statement did. Most major announcements had been trailed ahead of today. Whilst this is a standard feature of any modern-day Budget, this time around, there was extra jeopardy attached to any mis-steps.
The UK is officially in recession, but it’s likely to be shallower than feared as a result of today’s measures, Hunt claimed, and the long-awaited Office for Budget Responsibility (OBR) forecasts supported this. Inflation has also hit 11.1%, and is likely to average around 7% through next year. Despite this, the pensions ‘triple-lock’ is protected (anything less may have been difficult to get past his own backbenchers), and benefits increases will also track inflation this year.
Overall, a ‘consolidation package’ to the tune of £55bn was rolled out, roughly half coming from extra tax and the remainder from public spending controls, although the latter are broadly back-loaded to 2027/28, potentially into the realm of the next Westminster administration. Comments about this being the new austerity were compared to 2010, when overall cuts and tax measures totalled around £200bn. Nonetheless, there is no secret that things will still be tough for many over the next couple of years.
Individuals will take some time to fully assess the personal or business impact from today, at a time when clarity of thought and action will be much needed.
So, let’s pick out some headlines and things to mull over with your own financial advisers:
- Fiscal drag is a phrase you will hear a lot over the coming months; the effect of dragging more taxpayers into higher tax bands as a result of not increasing allowances over time. Already announced to 2025/26, allowances and thresholds for income tax, National Insurance and inheritance tax will be frozen for a further two years, going up to April 2028
- As a result, an individual earning £50,000 in most of the UK is estimated to be £1,939 worse off in the 28/29 tax year and £5,592 poorer over the five-year period from now. That is without any increase in the headline tax rates
- The threshold for the top rate of income tax, 45%, will come down from £150,000 to £125,140, the point at which the 60% income tax taper ends. One route to mitigate exposure to higher and additional rate income tax is through making pension contributions, as these currently provide tax relief at the marginal rate. Those who have the option of contributing to their pension via salary sacrifice should certainly consider it, as this system offers relief from National Insurance in addition to income tax
- Those business owners or retirees who have some control over how they source their income must look again at how that is structured. This point was emphasised by the significant changes to dividend and capital gains taxation being phased in over the next 18 months. The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 in April 2024. Capital gains tax allowances will more than halve next year to £6,000 and halve again to £3,000 per person from April 2024. Underlying tax rates for both are unchanged. The key message here is to sit down with your adviser between now and March (preferably sooner), to look at your options and understand any implications for your cashflow
- On Inheritance Tax, HMRC took a record £6.1bn from the tax in 2021/22, 14% more than in 2020/21. With today’s announcement of a longer freeze on allowances, approaching £1bn extra tax could be paid by estates over the additional two years up to 2028. Anyone likely to be affected should look again at their existing planning and review what else they may want to do for the next generation
- Whilst no immediate changes were announced regarding the taxation of pension assets being passed down the family, the freeze on the pension Lifetime Allowance (LTA) gets extended also, (more fiscal drag), meaning around 2 million pensioners in total facing some kind of LTA charge over that period. When the lifetime allowance was first created, it was designed to stop the super-rich from creaming off too much in pension tax relief over their lifetime, but since then, the allowance has dropped from its highest level of £1.8m to just over £1m today. If you are approaching or already in retirement, please sit down with your financial planner to understand how, when, and when not to access your pension savings to avoid any unexpected or unintentional tax bills
- The windfall tax on large oil & gas firms goes up by 10% until 2028, with a temporary 45% levy on electricity generator from January 2022 too. Allied to this, the energy price cap will be increased after this winter, but with extra help for more vulnerable households
- Electric vehicles will no longer be exempt from vehicle excise duty
- To ‘level up’ the entirety of the UK, the Chancellor said that the devolved administrations will receive £3.4bnover the next two years. £1.5bn for Scotland, £1.2bn for Wales and £650m for Northern Ireland. This will help people across the union during these challenging economic times he claimed. For residents of Scotland, we must wait for the forthcoming Holyrood Budget to see what further measures are announced around income tax and spending.
Overall, no major surprises on the day for those concerned with personal finances. However, when taken all together, a raft of tweaks, freezes and cuts to allowances should be a call to arms for financial advice firms to reach out to their clients and do what they do best; listen, understand their client’s objectives, and then guide them through the coming period.