Tax bills set to spiral as Chancellor confirms deep freeze on personal taxation

It’s not yet Christmas, but Scrooge has arrived early. The nation was braced for tax hikes after the new Chancellor, Jeremy Hunt, used the weekend media rounds to prime the public for a rise in their tax bills.

That is precisely what he delivered today, with considerable changes to taxation of dividends and capital gains, as well as a freeze on income tax thresholds, a lowering of the additional rate income tax threshold, and a less generous ‘Energy Price Guarantee’ from April next year.

It feels impossible to think that less than two months ago the Government was taking an axe to taxes and handing out financial giveaways to almost everyone. But the new Chancellor was short on generosity and served up a bleak message to the nation.

Here are some of the key changes announced:

Capital Gains Tax and Dividends

Significant changes to the tax treatment of dividend income and capital gains were one of the biggest announcements impacting investors, although assets sheltered in a pension or ISA are protected.

Dividends

The tax-free allowance on dividends will be cut to £1,000 from next year and £500 from April 2024.

To give a practical example it means someone with a portfolio of £20,000 that yields 5% a year will hit the lower tax-free allowance of £1,000 from April next year, while someone with a portfolio of £10,000 that yields 5% a year will hit the tax-free allowance of £500 from 2024.

Some company directors may also need to assess the impact for them, which seems at odds with the government’s message that it aims to boost growth and investment.

Capital Gains

The tax-free allowance for Capital Gains Tax had already been frozen until 2026, but the Chancellor has now opted to cut the allowance sharply.

It will see the current £12,300 allowance cut by more than half to £6,000 from next April, and then again to £3,000 in April 2024. The move will mean that investors will pay an extra £25m in tax from next year and another £275m the year after, according to government estimates.

A basic-rate taxpayer with gains over the current tax-free limit will face an additional cost of £630 from next year, while higher and additional rate payers will be paying £1,260 more in tax. The following year this then ratchets up to an extra £930 for a basic-rate taxpayer the year after, or £1,860 for a higher-rate payer, when compared to the current system.

Those selling a house or flat that isn’t their main residence will face even an even bigger hit courtesy of the 18% and 28% rates on property for basic and higher rate taxpayers.

Anyone who hasn’t used their current Capital Gains Tax allowance could consider cashing in gains before the tax-year end in April, while those with ISA allowance remaining might utilise a Bed-and-ISA transaction to sell investments up to the maximum gain of £12,300 and rebuy them within their ISA.

Source: AJ Bell. Figures assume your gains are higher than the current tax-free allowance of £12,300

Energy policy and cost of living support

The decision by Jeremy Hunt to curtail the Energy Price Guarantee is a huge blow to households. From April the average annual household bill will rise to £3,000, but the reality is that many households will face far higher costs than this. We’ve seen energy prices increase by 90% over the past year despite the Government intervention, so ratcheting down the support for many households leaves them literally out in the cold. That said, the current prediction is that the average annual energy bill will rise to £3,700 (Cornwall Insights) from April – so the move protects households from a significant chunk of this increase.

Government will also renew cost of living payments for the poorest in society. It means that many on the lowest incomes will get vital additional support to help with rising energy bills. The Chancellor has also made it more generous for those on benefits, with a payment of £900 from April (compared to this year’s £650). Pensioners will get the same £300 they got this year, while those on disability benefits will also get the same £150.

Income tax - Additional rate threshold cut

Two months ago the highest earners were celebrating the abolishment of the additional rate of tax. But they are now being forced to share in the pain of tax hikes, with the threshold at which that 45% rate kicks in being lowered from £150,000 to £125,140. The move will cost someone on £150,000 almost £1,250 a year extra in tax.

The move will pile an extra £420m in tax on higher-paid workers next year, rising to £790m the year after. To make this threshold cut at a time when wages are rising considerably means far more people will be captured in the additional rate tax net.

The latest Government figures show there is already expected to be a 50% increase in the number of additional rate taxpayers this year, even before this change was made. This will put the rocket boosters under the number caught in the 45% rate.

Source: AJ Bell

Income tax - Frozen allowances

The squeezed middle will also suffer as Government freezes the thresholds at which we all pay tax.

The point at which you start paying tax on earnings, and at which the higher rate (40%) tax kicks in, will now be stuck at their current levels until 2027/28.

As wages grow it means that millions more lower earners will find themselves paying tax, and middle earners risk being dragged into the higher rate tax bracket as their earnings grow.

We estimate those earning £50,000, and so hovering just under the current higher-rate threshold, will be hit the hardest, paying £6,570 more in income tax over the entire period of the tax freeze from 2022/23 to 2027/28. That represents a 14% increase in their income tax bill over that period. But even those on lower salaries will be paying significantly more tax, with someone on the average UK salary of £33,000 paying almost £2,600 more income tax thanks to the freeze (see table).        

This stealthy tax rise is brough about by ‘fiscal drag’ (when earnings rise but tax thresholds don’t). It isn’t necessarily a topic people talk about at the pub with their friends and family and government will be hoping the nation doesn’t fully recognise the scale of this huge tax hike. Although it avoids breaking a manifesto promise by hiking headline level rate of tax, it still amounts to a sizeable tax rise.

Source: AJ Bell. Median full-time salary is £33,000, based on ONS figures from April 2022. Inflation rate from previous September applied in each tax year, for years 2024/25, 2025/26 and 2026/27 the Bank of England's latest projections for Q4 in the previous year is used, for the increase applied in 2027/28 the Bank of England inflation target of 2% is used. Wage growth figures taken from March 2022 OBR report, with 2027/28 figures based on average of previous years

State pension triple-lock confirmed

While Jeremy Hunt’s sweeping Autumn Statement tax raid will hit the pockets of millions of people, those who have reached state pension age will have their incomes protected after the Chancellor confirmed the triple-lock, abandoned for 2022/23, will be reinstated next year.

This means the state pension and pension credit will increase by 10.1%, in line with the CPI inflation measure for September 2022. The decision to raise working age benefits in line with inflation also ensures the Government avoids any accusations of favouring one generation over another.

As a result, the full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.85 per week (£10,600.20 per year) from April 2023. This is something of a milestone as it will be the first time the UK state pension has breached the £10,000 a year mark.

The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase from £141.85 per week to £156.20 per week (£8,122.40 per year).

It is worth remembering that not all pensioners will be in receipt of the full state pension. According to the latest official figures, 15% of retirees receive a state pension worth less than £100 a week, with 1-in-5 women taking home a state pension income below this level.

The government has also confirmed that the ongoing state pension age review will report next year, requiring the government to make a decision on any recommendations to alter the state pension age.

Minimum Wage

In a rare bit of good news for workers, around 2 million people will get a chunky payrise from next year, as the Government has pledged to boost the minimum wage by 9.7%, taking it from £9.50 to £10.42 an hour. For someone working full time on the minimum wage it will mean a boost of £1,677 a year to their pay.

Remember that the value of investments can change, and you could lose money as well as make it. How you're taxed will depend on your circumstances, and tax rules can change.

These articles are for information purposes only and are not a personal recommendation or advice.