I was surprised that during the Chancellor’s 63 minute Autumn Budget speech, he did not mention Income Tax, Inheritance or Capital Gains Tax once – in fact we had to wait until the end of the speech for there to be any significant mention of individuals at all. Almost all the other announcements on the day (of which there were many) were either in relation to duties or corporation tax. The major personal taxes announcement of the introduction of the Health and Social Care Levy was made well before 27 October.
There was certainly good news with the reduction in the tapering of universal credit from 63% to 55% which will come into effect no later than 1 December 2021. This change will make the universal credit calculations pretty complex, bearing in mind that they are not straightforward to start with, so hopefully support will be available for those eligible to make this process as easy as possible.
Frozen Personal Allowance and tax bands
We already knew that the personal allowance and tax bands will be frozen for 4 years from 6 April 2022 when the Chancellor made the announcement in the March 2021 Budget. According to the Red Book over 2.3 million taxpayers may be impacted by these measures with over 1 million of low earners being brought into the tax net by 2026. This means that those that are currently earning close to £12,570 (the current tax free personal allowance that is also being frozen until 2026) will not be paying income tax at the moment but as their wages rise above this threshold, the excess will be taxed at 20%. As with all measures of this type, it is always those at the “cliff edges”, i.e. those on the tipping point of each band who are most hit so in this case those earning £12,570, £50,270 and £150,000. The Office of Budget Responsibility (OBR) have estimated that the cost to a higher rate (i.e. 40%) taxpayer could be as much as £734 per year by 2026.
Health and Social Care Levy and dividends
The Health and Social Care Levy was announced in early September which was the introduction of a whole new tax, ring-fenced to fund health and social care. The 1.25% will apply to the same income as National Insurance which means earned income such as salary and self-employed profits but not unearned income such as pension, rental or investment income (although see my comments below about dividends). It will also have the same starting thresholds as National Insurance, will be uncapped and will fall on employers, employees and the self-employed.
At the same time as the Health and Social Care levy was announced, the Prime Minister also announced a 1.25% increase on all dividend rates to ensure that “…those with dividend income, like business owners and investors, will be making a contribution in line with that made by employees and the self-employed on their earnings…”. This increases the rates to 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The tax-free dividend allowance remains unchanged at £2,000 and dividends received through ISAs also remain tax-free. It has been confirmed in the Autumn Budget that the additional rate applies to trustees as well as individuals.
The OBR estimates that these measures collectively will raise additional tax of almost £40 billion over the next 4 years. To put this into context, total tax revenues in 2020/21 were c£800bn so these changes could account for as much as 5% of overall tax receipts so should not be ignored.
Basis period reform
HM Revenue & Customs (HMRC) have been consulting on basis period reform which hit some stumbling blocks in recent weeks. Further details announced in the Autumn Budget show that HMRC have listened to feedback but are still keen to press ahead with the changes coming into effect from 6 April 2024. If you are self-employed or in a partnership and your accounting year-end is not the 5 April or 31 March, you do need to consider how the change from an accounting period basis to a tax year basis could impact you. For those that also qualify for the super-deduction, I expect that there will be significant time spent looking at various calculations to understand when would be the right time to invest in qualifying expenditure. This will not be a straightforward question and the outcome will depend upon a variety of factors making getting the right answer difficult. I expect that this will be a hot topic over the coming months.
What was missing and what could be next?
Having said all this, there was a lot absent from the Budget. The Chancellor’s speech itself did not mention any of the capital taxes but the OBR did suggest that revenues from these taxes are expected to increase over the next 4 years. Capital gains tax is expected to raise an additional £3.5 billion. This is significant given that it only currently raises c£9 billion and no changes have been announced to its scope or rate so the OBR must be expecting the increased revenues to come through rising asset prices only. Inheritance tax is similarly due to increase by £0.7 billion during the same period perhaps for the same reason.
So are there any themes from the Autumn Budget that we think will set the scene for the new economy post COVID? We saw an announcement in relation to research and development relief which restricts any tax credits to activity undertaken in the UK. Could this be a post-Brexit theme for future changes to come? Could the Chancellor look to restrict personal tax reliefs such as the inheritance tax Business Property Relief to UK activities only? Time will tell but leaving the EU certainly makes this possible.
We are expecting further tax measures to be announced “later in the Autumn” which have been described as a focus on tax administration and maintenance which would suggest nothing substantial is expected. Any measures to be announced would not require legislation in the Finance Bill or have an impact on the government’s finances at this stage. This would suggest simplification rather than reform but we will need to await Tax Day 2 before we can say for certain. The phrase “… at this stage” does not in my view rule out reform altogether.
So the Autumn Budget was a flurry of multiple announcements but very little in terms of new announcements from a personal tax perspective. However, the changes already announced will raise significant sums over the next 4 years so should not be underestimated – the majority of taxpayers will have to pay more tax as a result of these measures. Time will tell whether the Chancellor’s goal of reducing taxes by the end of Parliament will be achieved – it is certainly a brave statement to make in these uncertain times.