Now we are settled into a new tax year the M&G Wealth technical team takes stock of how the tax landscape lies and most importantly the key areas affected for financial planning.
From Spring Budget 2021, through Autumn Statement 2022 and then Spring Budget 2023 there has been much change in the tax landscape – and I doubt you will find anyone who is not impacted. Some minor, but some major. Let’s take a look at the individual taxes.
Income Tax
On the plus side tax rates are unchanged! But that hides the story that the personal allowance and higher rate tax thresholds have been frozen and will remain so until 2028.
The impact here is that of “fiscal drag” – rising incomes with frozen allowances and thresholds makes for more taxpayers paying more tax.
The OBR estimate that the freezing of the personal allowance and higher rate threshold will result in 3.2 million more people paying income tax, and 2.6 million more higher rate taxpayers.
The most significant change is with the additional rate threshold where the top rates of tax apply, 45% for most income and savings and 39.35% for dividends. Additional rate tax now kicks in at £125,140, a substantial drop from the previous £150,000. There are an estimated 792,000 impacted with 232,000 of those paying additional rate tax for the first time.
It should be noted that the story differs for Scottish Resident taxpayers. Like the Welsh Government the Scottish Government has some tax powers over non-savings non-dividend income. But unlike their Welsh counterparts they have used their income tax powers. Bands are frozen and the additional rate threshold has dropped like the rest of the UK but the tax rate for both higher and top rate is increasing by 1% to 42% and 47% respectively.
The remaining taxes work on a UK wide basis.
Capital Gains Tax
Not as impactful on the population and the total receipts are a drop in the ocean compared to income tax but an important tax for those who pay it or would prefer not to! The CGT exemption has been cut by over 50% to £6,000 for 2023/24 and will be halved again to £3,000 in 2024/25. CGT bills are expected to rise with an estimated 260,000 new trusts and individuals paying CGT for the first time. Remember when advising trustees of non-bare trusts that their available CGT exemption is half that of individuals (and less than that if there are multiple settlements).
Dividend Tax
The Dividend Allowance was the other key change from the last Autumn Statement. The allowance was originally £5,000, then cut to £2,000 from April 2018, but is only £1,000 for this tax year. It will then be halved to £500 from 2024/25. Over three million people will be impacted by this measure, with many paying tax on dividends for the first time. And this is the second part of a double whammy as we move into a second year of increased tax rates, with the actual rates increased by 1.25%, to 8.75%, 33.75% and 39.35%.
Inheritance Tax
Like the other allowances the IHT Nil Rate Band and Residence Nil Rate Band (and its £2million taper threshold) is frozen until 2028. Every month seems to have a headline where there are record receipts and / or more estates paying IHT. This trend is expected to continue. Each new announcement comes with a finger being wagged at rising house prices as the culprit.
That is part, but not all of the story. The full IHT statistics we see each July tells a story where between 30% and 50% of the value of tax paying estates is cash, securities, and life assurance policies – all easy to remove from your estate. So, fingers should be wagged at a failure or unwillingness to plan. As they say IHT is a voluntary tax.
Corporation Tax
The corporation tax changes from budget 2021 have caught up. There is no longer a single rate of 19% for all. From 1 April 2023, the main rate of corporation tax is 25%, there’s a “small profits” rate of 19% for those with profits below £50,000 and to avoid a cliff-edge there is marginal rate relief for those with profits between £50,000 and £250,000 meaning an effective rate of tax of between 19% and 25%. Or, as I like to explain it the first £50,000 is taxed at 19%, the next £200,000 at 26.5% and the rest at 25%.
Note, that companies pay corporation tax on the profits for an accounting period. If the accounting period spans 1 April 2023, profits will be apportioned between those falling within the financial year 2022, (taxed at 19%), and those falling within the financial year 2023. For example, if an accounting period is aligned to the calendar year then 25% of profits (January to March 2023) are taxed in the 19% world and 75% (April to December 2023) in the new world.
A big change for some and the government expect 30% of companies to be paying a higher rate of corporation tax than before.
Pension Tax Allowances
The big change! And the three less big ones. The three strains of Annual Allowance standard, money purchase and tapered have all been increased allowing more people to save into pensions without triggering an annual allowance charge, or reducing the tax payable on existing savings. The big change is more in the higher net worth arena with the abolition of the lifetime allowance, which isn’t actually an abolition this year! The LTA charges have been reduced to 0% and replaced with marginal rate tax for 23/24. A sticking plaster approach to removing the LTA pending radical surgery with the actual abolishment from 2024/25 onwards. How that happens we don’t know.
I think there are three key areas for the financial planner.
SME business owners
Have borne the brunt of the changes with almost everything affecting them. The corporation tax increase will reduce profits for some, so reduce the amount available for dividends. And those dividends themselves could be in a higher tax bracket than normal, perhaps in the additional band alongside the increased rate of 1.25%.
Employer contributions have become even more attractive from a tax perspective than ever before and SME business owners will look for assistance, possibly in conjunction with their accountant, to arrive at the correct blend of salary, dividends and pension contribution to meet their current and future needs.
Furthermore, for those with accounting periods not aligned to the financial year, consideration will need to be made on potentially deferring tax relievable actions until they can become fully relievable at the higher rate. Conversely, where there is the potential for taxable actions, such as cashing in a company held investment, it may be beneficial to do so when some of that will be subject to tax in the 19% world.
LTA impacted pension holders
What to do about abolishing the LTA? There have been many questions on the topic which Mark has covered in his article on the Top 10 Spring Budget Lifetime Allowance Questions.
We know what 2023/24 looks like but have no detail beyond this on how abolition will happen. Against a backdrop of a Labour statement saying that they were going to reverse the LTA changes. But clients will still need advice. It is inconceivable, but not impossible, that any actions taken in 2023/24 will be redone on a different tax basis than that in force at the time. I suspect it’s much more likely the LTA would be reintroduced for future taking of benefits with no look in the rear-view mirror.
It would seem that for those impacted by the LTA then paying in what they desire and then ensuring any LTA excess is placed into drawdown prior to any future rule changes would allow those to take advantage of this window where the LTA does not exist. The decision would involve a bit more thought where the LTA has not been used up. Putting your excess into drawdown involves first using your LTA so releasing a potentially large sum of cash into the non-pension world – what to do with it? Is IHT an issue?
Steady as she goes, inform but pend action until a little more is known would seem sensible.
Direct investors
With more people paying higher tax, increased dividend tax rate, reduced dividends allowance, a reduced additional rate threshold and the reduction in the capital gains tax annual exempt.
Broadly, speaking the size of portfolio that will generate a tax impact is half what it was last year and will be three quarters of that amount next year. For taxpayers, investments as low as £20,000 will trigger tax for many people. Rebalancing a portfolio or withdrawing money to fund an ISA contribution may well trigger a taxable capital gain. OEICs held directly are negatively impacted by all the changes so there should be more people using tax wrappers to hold their OEICs. For those with direct holdings good quality CGT management, including the fastidious claiming of loss relief where possible will be the order of the day.
Investment bonds have undoubted tax advantages (amongst other things) for a lot of people. This was the case before these Autumn Statement changes, which have amplified the advantage. The tax system points to GIA use falling and those investments should be held in tax wrappers. And where the pension or ISA allowance is not available that should then be a bond. Onshore or offshore? It depends!
After a, relatively, quiet period in the tax world we have seen three fiscal statements changing the tax landscape for just about everyone. With more tax being paid, more taxpayers and more complexity there’s no better time to be involved in the tax side of financial planning.
And given most investments are available in most tax wrappers isn’t that the important bit anyway?
