The one thing we all knew before the Chancellor stood up to deliver the autumn budget on Thursday 17 November was that it would be painful – the unknown was precisely how painful.
Pensions
Before the budget statement there was lots of speculation that the life time allowance would remain fixed for longer, annual allowance may be reduced, ability to claim higher rate tax relief would be removed and the ability to take a lump sum tax free would be removed. However, Pension arrangements emerged from the budget with no changes.
As a result of other modifications, particularly those in respect of the income tax thresholds, now may be a good time to review levels of pension contributions.
Income Tax thresholds
The personal allowance and higher rate tax thresholds are now to be frozen at £12,570 and £50,270 until 5 April 2028. The 45% Additional Rate currently applies on income above £150,000, but from 6 April 2023 that will be reduced to £125,140. With inflation at its highest rate for many years, if income rises to compensate for inflation more taxpayers will become higher rate and additional rate tax payers.
The removal of the personal allowance on a £1 for every £2 basis on income over £100,000 remains, so this essentially means that the UK tax system will start at 20% then 40%, then 60% and then 45% with the bands as follows:
| Income Range | Tax Rate | |
| £0 | £12,570 | 0% |
| £12,570 | £50,270 | 20% |
| £50,270 | £100,000 | 40% |
| £100,000 | £125,140 | 60% |
| £125,140 and over | 45% | |
For those earning over £100,000, the payment of additional pension contributions so long as the amount stays within the £40,000 annual allowance is worthy of serious consideration to reduce tax bills.
Current Scottish Tax Rates for tax year 2022/23
| Income Range | Tax Rate | |
| £0 | £12,570 | 0% |
| £12,571 | £14,732 | 19% |
| £14,733 | £25,688 | 20% |
| £25,689 | £43,662 | 21% |
| £43,663 | £100,000 | 41% |
| £100,000 | £125,140 | 61.5% |
| £125,141 | £150,000 | 41% |
| £150,001 and over | 46% | |
It is not yet known whether the Scottish Government will follow the action in the recent Autumn Budget and start the highest rate of tax at an income of £125,141.
Tax on dividend income
The current dividend nil rate band of £2,000 is to be reduced to £1,000 in April 2023 and then further to £500 in April 2024.
The dividend tax increase of 1.25% that applies for tax year 2022/23 will be maintained for tax year 2023/24 so that for basic rate payers dividend tax will be 8.75%, for higher rate tax payers, 33.75% and for additional rate tax payers 39.35%.
This will impact company shareholders who take part of their income in the form of dividends but also a number of investors who hold equity OEIC funds directly. It should be remembered that even if income is reinvested and not distributed it remains income for tax purposes so a review of these investments may be appropriate.
National Insurance contributions
The removal of the additional 1.25% National Insurance contributions that was originally introduced for the current tax year is to remain, so from 6 November 2022 NI rates revert to the 2021/22 levels.
There will be some changes to the various thresholds with several being aligned with the Personal Allowance of £12,570 with effect from 6 April 2023.
Although this will mean slightly lower National Insurance contributions, consideration of making pension contributions by salary sacrifice will continue to make sense from a “tax “ perspective.
Capital Gains Tax
Currently it is possible to have a capital gain of £12,300 in the tax year without incurring a tax liability. This will reduce to £6,000 from April 2023 and then again to £3,000 from April 2024.
This is likely to impact anyone invested in OEICs, shares or property. It is quite common for investment portfolios to be rebalanced periodically and this will become harder without incurring a tax liability. If, however, investments are held in a single company multi asset fund then this is not an issue as these funds are rebalanced by the investment manager and not the individual investor.
Inheritance Tax
The inheritance tax thresholds are now going to remain at current levels until April 2028. The nil rate band will remain at £325,000 with the residential nil rate band remaining at £175,000. The nil rate band had therefore remained the same since the 2009/10 tax year so has reduced significantly in real terms. This was once deemed as a tax that only applied to the wealthy, but more and more people are being drawn into the IHT net.
This means that more than ever, anyone with assets around this level should seek assistance from a financial planner to explore the various ways that the impact of IHT can be reduced, whether this be through consideration of investing in certain assets or gifting assets down the generations.
Corporation Tax
The proposed changes in the September mini budget have been scrapped so we are back to the changes put forward in the Spring 2021 budget.
Corporation Tax will remain at 19% for the financial years commencing 1 April 2021 and 1 April 2022, but from 1 April 2023 will increase to 25% on profits over £250,000. For small businesses with profits of £50,000 or less the 19% rate will remain.
As a result of these changes, some businesses may wish to see if they can accelerate income or gains so that they fall into company years before the changes take place. In addition, delaying tax allowable expenditure until the new regime kicks in may be an option.
When all of these changes are taken together it is certainly not a happy story. Individuals and businesses will need to consider their financial plans and take advice on the options that are available. Business owners may need to review their remuneration strategies. Pension contributions will be more valuable for many. Finally, businesses may wish to consider investing some of the accumulated profits as this may open up other tax saving strategies.
Robert Young BSc FIA
Director & Consulting Actuary November 2022
t: +44 (0) 20 7518 0251
m: +44 (0) 7793 062 419
e: R.Young@hanover-pensions.co.uk