If a week is a long time in politics, then the two months that have passed since the ill-fated ‘mini-budget’ of ex-Chancellor Kwasi Kwarteng have felt like an age.

The Autumn Statement was a second bite of the cherry for a new-look Conservative Government, led by Prime Minister Rishi Sunak and Chancellor of the Exchequer Jeremy Hunt, as it seeks to recover some electoral credibility ahead of a General Election in 2024.

The statement was premised on bringing back sound financial management into the heart of UK government, as the country heads into what is forecast to be the longest recession in almost a century and which is likely to cause:

• Shrinking economic growth
• Higher rates of unemployment
• Higher inflation
• Reduced corporate profits
• Shrinking government tax revenues
• Falling household and corporate spending and investment

In order to fill the £55 billion hole in government finances (caused by increased spending during the Covid-19 pandemic, government support for households and businesses in the face of soaring energy bills and a slowing economy which has meant a decrease in tax receipts), Hunt announced a range of tax hikes and spending cuts - meaning most people will be paying more tax in the years ahead.

What were the main changes announced in the Autumn Statement?

At the start of the statement, the Chancellor acknowledged three key developments that were driving his policy:

1. The economy has struggled to recover from the Covid-19 pandemic of 2020 (the economy is still smaller than in April 2020) and the government needs to find ways to support growth, wages and jobs. Hunt conceded that The UK has now, once again, fallen into recession;

2. Increasing prices have hampered the recovery (with UK inflation rising by 11.1% in the year ending October 2022), but he pinned the blame on global economic headwinds, outside of the government’s control (supply chain slowdowns caused by global lockdowns, and a spike in gas and oil prices, caused by Russia’s invasion of Ukraine) which have put pressure on household and business finances;

3. This high and increasing inflation has caused The Bank of England to increase interest rates to the highest level we’ve seen in the UK since November 2008. This has put further pressure on homeowners, who have seen their mortgage costs increase and businesses, which have to pay more to borrow, and this limits their ability to grow.

The package of measures announced in the Chancellor’s Autumn Statement seeks to fix the £55 billion hole in the UK’s public finances and promote long-term growth in the economy.

The key changes announced, impacting personal and household finances, were as follows:

• Freezing the thresholds until at least 2028 for the:

  • Tax-free personal allowance (£12,570)
  • Higher rate of income tax (40% tax on earnings above £50,270)
  • Various National Insurance Contribution thresholds for employers and employees
  • Inheritance Tax Thresholds (£325,000 nil rate band and £175,000 residence nil rate band)

• A reduction in the threshold at which the 45% additional rate income tax is levied, down from earnings above £150,000 per year, to those above £125,140. This means someone earning £150,000 per year will now pay £1,243 more in income tax each year.

• Cuts to the annual tax-free dividend allowance (halving from £2,000 to £1,000 in April 2023 and then halving again to £500 from April 2024) and the annual capital gains tax exempt amount (reducing from £12,300 to £6,000 in April 2023 and then again to £3,000 from April 2024).

• The state pension continues to rise with the ‘triple lock’ (the higher of average wage growth, inflation, or 2.5%) and therefore increases by 10.1% in April 2023.

• The review of the increase in the state pension age will also be brought forward to 2025, which could increase the state pension age sooner than previously planned. This may also affect the age at which you can access your private pension, with more details to be announced.

• Stamp Duty cuts announced in the mini-budget will remain in force until 31 March 2025 in a bid to support the housing market.

• An extension of the government’s energy price cap of £2,500 per household beyond April 2023, but at the higher rate of £3,000, for one more year. Whilst there will be further targeted measures to help the worst-off in society with their energy costs, most homes can expect to see energy bills rise even further in the near future, particularly those with large, older, energy-inefficient properties, or second homes.

There were also a number of announcements made that affect business rates and taxation. If you own a business, you should discuss these with your accountant to see how they might affect you.

How does this affect me and my plans?

The primary focus of this statement was to plug the hole in public finances, whilst financing this mainly from middle and upper earners, and shielding the least well-off in society from the worst of the economic pains.

The headline takeaway is that more people will be paying more tax in the UK each year.
This makes proper tax planning and strategy more important than ever if you want to meet your financial goals.

Octopus Wealth works with people like you to help understand your personal goals and build a flexible, long-term plan to ensure your strategy remains relevant, regardless of the ever-changing tax regime or swings in investment markets.

Our key takeaways from the Chancellor’s statement are as follows:

Four changes to your pension planning

1. Make sure you don't have gaps in your National Insurance Contribution Record. This could reduce your entitlement to the basic state pension, which is about to increase by over 10%.

   Whilst the prices of many investments have gone down in 2022, the government’s commitment to increasing the state pension with the Triple Lock means that if you’re nearing retirement, you should check that you're entitled to as much of the state pension as possible, otherwise you could miss out on this inflation-protected, government-guaranteed, retirement income. You can request a statement of your state pension entitlement here.

2. Consider making the most of your annual pension contribution allowance, which is typically £40,000 a year (although can reduce for high earners). If you haven’t made maximum pension contributions and have the budget to do so, this could be a really tax-efficient way to build up your long-term retirement pot. For those earning above £125,000 a year, you may be able to get up to 45% tax relief on contributions.

3. You may also be able to use any unused pension allowances from the previous 3 tax years, to contribute more than £40,000 into your pension. This can be a complex calculation and is something we can help you with to ensure you maximise the tax allowances that the government still gives you.

4. With the reduction in the dividend allowance and a freezing of the thresholds, there may also be a good opportunity for business owners to make pension contributions from their business. These payments aren’t subject to income or corporation tax, so enables business owners to extract surplus funds to help build their overall long-term wealth in a very tax efficient way.

Changes to Tax Allowances and Exemptions

1. Frozen inheritance tax allowances actually means a reduction in “real terms” when you account for inflation. For those worried about inheritance tax (currently levied at up to 40%), pensions could also be a tax-efficient and flexible way of passing on funds to your loved ones as they fall outside of the inheritance tax regime in most instances.

2. The reduction of the capital gains tax allowance will likely increase taxes for those who hold investments outside of an ISA or pension, as well as decreasing the total returns for property investors. For those in this situation, you might consider realising any capital gains within your tax free annual exemption of £12,300, before April next year. It’s a use it or lose it allowance, with tax of up to 20% on any gains made selling most assets (and up to 28% on residential property gains). If you are married or in a civil partnership, this could allow even higher gains to be realised without paying tax.

3. With the tax-free dividend allowances reducing, it’s a good time to review whether you’re holding dividend paying investments in the best way. For instance, if you are married or in a civil partnership and your partner pays tax at a lower rate than you, it may make sense to move some of these investments to the lower-tax paying partner to save tax in the long-run. This change will also increase tax for business owners who pay themselves dividends.

4. Consider contributing into an ISA if you’re not already doing so. The decreases in dividend and capital gains tax exemptions make the shielding of eligible investments within the tax-free sanctuary of an ISA even more attractive. The current allowance remains unchanged at £20,000 per year and all gains and income within the ISA are tax-free and there are no taxes on withdrawals.

5. Make sure you have a sufficient cash buffer. Given more economic pain is expected to come over the next few years, it’s more important than ever to have an emergency cash pot in place, to soak up unexpected costs, and insurances in place to protect you and your loved ones in the event of death, illness or serious injury.

6. Consider whether other tax-efficient investments could help you grow your wealth and help you reach your goals, now the main allowances are being reduced. As part of a broad and balanced financial plan, investments such as Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Business Relief (BR) products, whilst typically higher risk, can help some investors to meet their goals in a tax-efficient manner; where capital gains and dividends are no longer as tax-efficient and where marginal tax rates are higher.

With the announcements made in the Autumn Statement, the need for robust and proper planning of your investments is more important than ever. This will help you keep the tax drag on your pot to a minimum in a higher-tax world and ensure that your portfolio is better able to meet your goals - whether that be retirement, travelling the world, helping out your family and friends, or gifting to charity.

The tax environment remains ever-changing and highly complex, so please contact your Octopus Wealth adviser to discuss how the Autumn statement affects you.

If you don’t currently work with us and would like to have a free initial consultation with one of our partners on your finances, complete with your own personalised Lifeline (a financial forecast built using Octopus Wealth’s in-house modelling tool), you can book some time to speak with us here.

Disclaimer:

This blog post is a marketing communication for information purposes only and is not intended as an offer or solicitation to buy or sell any particular financial product. This post is for UK retail investors. Circumstances vary for individuals and any personal opinions or firm opinions represented in this presentation should not be seen as advice or a recommendation to take any specific course of action. We are not tax advisers. This is based on our understanding of current legislation which is subject to change.

Any references to past performance should not be taken as a reliable indication of future returns. The value of an investment, and any income from it, can fall or rise, and you could get back less than your original investment. Fees and commissions may have not been expressly indicated, and you should take into account the effects that these have on the performance of a financial portfolio.

Octopus Wealth is authorised and regulated by the Financial Conduct Authority.