DB Wood Team
18th November, 2022
Blog, IC Insights
Yesterday’s financial statement delivered on the expectations that the UK chancellor has been setting in recent weeks. The budget delivered a tough and necessary fiscal response, supporting the view that the alternative of borrowing more to deliver growth, simply does not work when debt levels are elevated.
It is worth remembering that UK policy is in a very difficult spot. It is true that the rest of the Western world is suffering from high inflation and pending recession, most of which is a combined consequence from the Covid policy, supply change disruption, and the Russian led war. In addition, Brexit was always going to add further inflationary pressure on the UK and so from a fiscal perspective, the chancellor is between a rock and a hard place.
To the announcements themselves, a quick summary would be that this was a budget aimed at prioritisation of those most vulnerable in society, namely pensioners who are heavily reliant on the state pension, and those requiring financial support. This is being paid for by the rest of the UK taxpayers, with an increased responsibility for those with broader financial shoulders, such as those earning over £125,000 and those with investable assets.
One of the simplest ways of increasing tax revenue is to do it without anyone really noticing. People’s earnings generally go up each year, so by freezing the tax thresholds, more is collected.
The government had already announced a freeze to both income tax and inheritance tax thresholds out to April 2026, though this has today been extended by a further 2 years.
In addition, the number of additional rate taxpayers will be increasing significantly, with the band for 45% tax reduced from £150k to £125,140 from April. The latter number may seem random, but if you earn over £100k your personal allowance is reduced by £1 for every £2 of earnings, which at £125,140, leaves you without one. So tax rates now ramp up significantly for anyone earning over £100k, and those earning £150k of more will pay at least £1,200 per year more.
Finally, the tax-free dividend allowance is being reduced from £2k currently, to £1k in April and £500 from April 2024.
Capital Gains Tax
This is the one really targeted at people with assets such as investment properties and shares. Under current legislation, you have a £12,300 capital gains tax allowance to use against assets you sell with a gain, though that will now be reduced to £6,000 in the 2023/24 tax year, and £3k per tax year from then onwards.
Where they are spending
There was a lot of controversy around this years State Pension increase, and whether it would keep up with inflation. The annual increase from April was confirmed at 10.1%, with other means tested benefits also rising by the same amount.
Energy support will remain in place through the first half of next year, though the price cap will be increased by 20% from April, leading to the average household bill being £3,000 per year compared to £2,500 now.
NHS spending was also increased, and the Defence budget maintained at 2% of GDP.
From a research and development perspective, this budget committed one of the largest investments in recent history, with £20 billion being set aside over the next 2 years. Some of these points should not be overlooked, as there is a significant investment into future infrastructure, as well as support for those in lower income brackets.
Finally, although they seem keen to support the housing market, the recent increase in the 0% Stamp Duty threshold to £250k, and the extension of first-time buyer relief to £625k, will be scaled back from 2025.
Overall, it was a tough budget, though tough times require tough measures.
One core aim of these policies is to cool inflation, and we’d expect that once this is achieved you will see a significant change in the governments stance. Fiscally, the UK has reacted speedily to help restore its oversees reputation of sensible policy. This can be evidenced by the sharp recent fall in UK’s borrowing rate, which is now nearly 30% lower than it peaked at only 5 weeks ago. It still remains 250% higher than it was 1 years ago, increasing from 0.6% in November 2021 to 3.2% today, that said, we expect to see mortgage rates come down next year, as a consequence of the recent moves.
From a financial planning perspective, as allowances and rates get tighter and tighter, it is going to increase the requirement for an appropriate tax strategy. Our experienced team are of course on hand to outline what this means for you and are already thinking through the implications on the strategy that will best optimise your position. It means tax wrappers that offer valuable tax benefits, ISA’s, pension schemes and VCT’s become even more important.
A harsh statement, with clear intentions, though equally don’t be surprised if once those intentions are met, a more balanced policy approach will prevail.