It’s been a tumultuous time for the United Kingdom and our government. With the dismissal of Kwasi Kwarteng following his mini-Budget in September and the introduction of Jeremy Hunt as Chancellor of the Exchequer, the original budget has now been overridden by the Autumn Statement, announced yesterday. This has seen the government attempt to generate significant revenue to try and steady the economy. It’s been known colloquially as “The Big Freeze” due to widespread tax allowance freezes.

We’re cutting through the political and financial jargon and deciphering the Statement to reveal what it’ll mean for you. The key areas that may impact you are changes to dividend tax, income tax, inheritance tax, capital gains tax and pensions. Read on to find out more.

Dividend tax

Dividends are a percentage of profit paid to shareholders of a business. Prior to the Autumn Statement, you were able to receive dividends of £2,000 before paying any tax on them, down from a £5,000 tax-free allowance back in 2017. This has now been further cut to £1,000 from April 2023 and to £500 from April 2024.

Who will this impact?

Small business owners who use dividends as a personal income stream, and all those relying on income from dividends to supplement their monthly income, for example pensioners, will be impacted by this.

Income tax

There has been a lot of to-ing and fro-ing regarding income tax over the last few months. The current decision, as per the Autumn Statement, is to freeze the basic (20%) and higher (40%) tax rates until April 2028. The threshold for the 45% tax rate will be lowered from £150,000 to £125,140.

Whilst this may seem positive news for basic and higher rate tax payers, the tax-free “personal allowance” of £12,570 has been frozen for an additional two years, until April 2028. In real terms, and taking into consideration average wage growth, this will make the average person less well off than before, and could in fact push you into the higher tax bands.

How can you mitigate the impact of this?

To stave off the higher tax bands, salary sacrifice can be used as a means of reducing your income. This will be done through your pension company, and will reduce both your income tax and National Insurance too! Workplace pension auto-enrolment plans will need to be amended as soon as possible in order to be most effective for employees.

Inheritance Tax

Prior to the Autumn Statement, inheritance tax was at a rate of 40% on estates worth in excess of £325,000. The tax rate has increased along with property prices over recent years, but has now been frozen until April 2028. Again, on the surface this may look positive for your pocket – but in fact, with house prices starting to fall again, the expected reduction in tax will not happen imminently.

How can you reduce the impact of this freeze?

It isn’t impossible to reduce your inheritance tax bill, but will take a lot of planning. Here at Willday Wealth Management we’re happy to help you navigate this planning in order to bring the value of the estate down, and therefore pay less tax. Techniques to do this include making use of gift allowances, leaving a legacy to a charity in your will and setting up a trust, amongst others.

Capital Gains Tax

Gov.uk define Capital Gains Tax (CGT) as “a tax on the profit when you sell something (an ‘asset’) that has increased in value”. So you are taxed on the amount of increase, not the full value of the asset. Assets that you must pay CGT on include properties that are not your main home, shares that are not in an ISA, business assets and any personal possessions worth more than £6,000, with the exception of your car.

Prior to the Statement, the tax-free CGT allowance was £12,300, which meant that you only paid CGT on gains above this level. This has been reduced to £6,000 from April 2023 and further to £3,000 from April 2024.

Pensions

Regarding state pensions, the government confirmed that from April 2023 there will be an uplift of 10.1% in state pension payouts, in line with the inflation rate as it was in September. This is honouring the triple lock commitment made in the Conservative Party manifesto at the last General Election. Whilst this was deemed to be the government looking after pensioners, it may push them over the tax-free allowance of £12,570. If this happens, the pensioner will be subject to the basic rate of tax of 20% on income above the allowance amount.

You can find out more about how inflation impacts your pension in our blog post, here.