Niki Patel highlights key changes and tax planning opportunities for clients following the Autumn Statement
I think it’s fair to say 2022 was a year of confusion. A year with three Prime Ministers, four Chancellors and an abundance of financial statements.
Compared to the drastic announcements on 23 September 2022 in the Government’s Growth Plan, the Autumn Statement was somewhat restrained. That said, prior to the Autumn Statement, it was clear that personal tax and business tax would rise. As a result, the Autumn Statement confirmed a series of tax increases that will take effect during the following two tax years, which will, of course, have a financial impact on individuals and businesses.
In this article, I focus on what was announced and outline some of the potential planning opportunities that could be considered for your clients.
The basic rate of income tax will remain at 20%, the higher rate will remain at 40% and the additional rate will remain at 45%. The basic rate of tax applicable to dividends will remain at 8.75%; the higher rate will remain at 33.75%; and the additional rate will remain at 39.35%.
The income tax personal allowance (PA) will remain at £12,570 until 5 April 2028. The higher rate threshold will also remain at £50,270 (made up of the £37,700 threshold plus the PA of £12,570) until 5 April 2028.
However, it was announced that the income tax additional rate threshold will be lowered from £150,000 to £125,140 from 6 April 2023. Most individuals are entitled to a PA, a personal savings allowance (PSA) and a dividend allowance. However, the PA of £12,570 is reduced by £1 for every £2 where an individual’s adjusted net income exceeds £100,000 (broadly net income less any gross pension contributions to a registered pension scheme or charitable donations). This means that once income exceeds £125,140 it is totally lost. For every £100 of income between £100,000 and £125,140, you only get to take £40 home – £40 is deducted in income tax, while another £20 is lost by the tapering of the PA (i.e. £50 of lost PA, taxed at 40%) which effectively amounts to a 60% tax rate on income within this range.
In addition, it was announced that the dividend allowance will reduce from £2,000 to £1,000 from 6 April 2023 and to £500 from 6 April 2024. There were no changes announced in respect of the PSA, which will remain at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
Freezing the PA and tax bands further will mean that millions of individuals will end up paying more income tax. Further, reducing the additional rate threshold, combined with the current freezes in the PA and the higher rate tax band, will move more people into higher rate tax brackets. An individual earning £150,000 in the current tax year could be just over £1,240 (around £1,243) worse off from 6 April 2023, because an extra 5% of income tax will apply to the amount of their income that falls between £125,140 and £150,000; they could be even worse off if receiving dividend income.
- In terms of general planning, investing couples should aim to use their dividend allowances and PSAs in full (and ensure that they do not lose out on the ability to transfer the transferable marriage allowance where eligible to do so).
- Individuals should also try to arrange their investment holdings in such a way to ensure they fully use both PAs and starting/basic rate tax bands.
- Individuals should continue to maximise contributions to ISAs, particularly where dividends are likely to exceed the dividend tax allowance (reducing to £1,000 from 6 April 2023) and/or the higher rate tax threshold. They could also give consideration to investing into venture capital trusts (VCTs) – which pay tax-free dividends – and investment bonds (for tax-deferral).
- Consider redistributing investments between couples to potentially reduce the rate of tax suffered on income and gains. No income tax or capital gains tax (CGT) liability will arise on transfers between married couples or civil partners living together, or where the asset to be transferred is an investment bond. However, any transfer must be made on an outright and unconditional basis with ‘no strings attached’. This effectively means investments must be fully transferred, with no entitlement retained by the transferor.
- Where possible, couples should try to ensure that they both have adequate pension plans in place to provide them with an income stream in retirement, which will enable them to use their PA.
Due to these changes, advising clients to carry out planning, for example, where possible, timing income to fall into the current tax year, maximising the use of pension contributions and/or making gift aid payments, can help save on tax.
Evan has earnings of £115,500 in 2022/2023. This means that, without any planning, his PA would be reduced to £4,820.
This is calculated as follows:
£115,500 - £100,000 = £15,500
£15,500/2 = £7,750
£12,570 - £7,750 = £4,820
His income tax liability would therefore be as follows:
Less PA (£4,820)
£37,700 x 20% £7,540
£72,980 x 40% £29,192
If he were to make a gross personal pension contribution of £15,500 (£12,400 net), this would mean that his adjusted net income would reduce to £100,000, so he would benefit from a full PA and, in addition, the basic rate threshold would be extended from £37,700 to £53,200, providing him with higher rate tax relief on the contribution.
Less PA (£12,570)
£53,200 x 20% £10,640
£49,730 x 40% £19,892
The difference in the tax bill of £6,200 (i.e. £36,732 - £30,532) simply illustrates the further 20% tax saving on the pension contribution (£15,500 x 20% = £3,100), plus the higher rate tax saving on retaining the lost PA (£7,750 x 40% = £3,100). In addition, the pension contribution has benefited from £3,100 basic rate tax relief at source.
Therefore, the total tax relief on the £15,500 contribution is £9,300, an effective rate of 60%.
Individuals ought to seek advice to take maximum advantage of some of the IHT planning opportunities that are available to them
In the Growth Plan, which was announced on 23 September 2022, the previous Chancellor reversed the National Insurance increases of 1.25% that took effect from 6 April 2022. This means the rates from 6 November 2022, for employees, are 12% between the primary threshold (PT) and upper earnings limit (UEL) and 2% above, and 13.8%, for employers, above the secondary threshold. Unlike most of the Growth Plan announcements, this change remains in force.
The lower earnings limit (LEL) remains at £6,396 for 2023/2024 and the small profits threshold (SPT) remains at £6,725 per annum.
The UEL and upper profits limit (UPL) will be fixed at their current levels until 5 April 2028.
From July 2022, the National Insurance PT and the Class 4 National Insurance lower profits limit (LPL) were increased from £9,880 to align with the PA of £12,570 and will be maintained at this level until 5 April 2028.
The government will fix the level at which employers start to pay Class 1 National Insurance for their employees (the secondary threshold) at £9,100 until 5 April 2028. According to HMRC, the employment allowance means that 40% of businesses do not pay National Insurance and will be unaffected by this change, and the largest employers will contribute the most.
The Class 2 lower profits threshold (LPT) will also be fixed until 5 April 2028 to align with the LPL.
The Class 2 rate will be £3.45 per week, and the Class 3 rate will be £17.45 per week.
- Consider salary sacrifice for pension contributions. Using salary sacrifice means that both the employee and the employer pay less National Insurance, so further savings can be achieved.
Clara’s employer offers her a salary sacrifice arrangement. She decides that, from 6 April 2023, she is going to sacrifice £30,000 of her salary for an employer pension contribution of £30,000 in 2023/2024. By reducing her income to £100,000, she will benefit from the full PA. Her post-tax salary will reduce from £79,178.40 to £67,049.40, a reduction of £12,129 (£30,000 salary reduction minus a tax and National Insurance saving of £17,871) in return for pension contributions of £30,000. In addition, her employer may be willing to pass on some or all of their National Insurance savings and further enhance the pension contributions (see table 1 on the right).
Capital gains tax
The capital gains tax (CGT) annual exemption (AE) is currently £12,300, but will reduce to £6,000 for 2023/2024 and further reduce to £3,000 for 2024/2025.
The rate of CGT payable will depend on the individual’s other taxable income. Gains falling within the basic rate tax band are taxed at 10% and any amount falling above that will be taxed at 20%. This means that use of the AE in the current tax year can save up to £1,230 for a basic rate taxpayer and £2,460 for a higher/additional rate taxpayer. However, these savings will reduce to £600 for a basic rate taxpayer and £1,800 for a higher/additional rate taxpayer from 6 April 2023.
Gains incurred on residential property that are not covered by the private residence exemption are taxed at 18% for a basic rate taxpayer and 28% for a higher/additional rate taxpayer.
- Consideration ought to be given to maximising use of the current AE of £12,300 before it reduces to £6,000 from 6 April 2023, as the AE cannot be carried forward.
- A spouse/civil partner could make an outright and unconditional transfer (as mentioned above) of assets into their partner’s name to make use of their AE on subsequent disposal. This will mean that, between them, they can realise capital gains of £24,600 in 2022/2023 and £12,000 in 2023/2024.
- Such a transfer should not generally give rise to any inheritance tax (IHT) consequences or CGT implications. Indeed, it may even be worthwhile transferring an asset showing a gain if the asset is to be sold, if it would mean the surplus capital gain is taxed at 10% rather than 20%.
- Making use of losses. Current year losses must be deducted from capital gains of the same tax year, before deducting the CGT AE amount. However, where the loss is a carried-forward loss, the taxpayer need only use so much of the loss that reduces the taxable gain by an amount that leaves the CGT AE amount intact. Any balance of losses can be carried forward. Using losses in this way can therefore be tax-efficient, particularly for those who are higher/additional rate taxpayers and therefore pay CGT at 20% (or 28%), and will become even more attractive when the AE reduces to £6,000 in 2023/2024.
Ahmed, a higher rate taxpayer, has a share portfolio with gains of about £42,000 which he is looking to sell to help pay for home improvements. He has not made any capital losses in the current tax year but has brought forward losses of about £20,000.
Depending on how much Ahmed currently needs, better planning may be for him to sell a sufficient number of shares to use his AE of £12,300 in the current tax year and then sell the remaining shares next year to maximise use of both AEs and carried-forward losses.
Remember that individuals have up to four years after the end of the tax year that they disposed of the asset to report the loss to HMRC via their self-assessment tax return, or if they do not complete a return they can write to HMRC instead.
As previously confirmed, the planned increase in corporation tax to 25% for companies with more than £250,000 in profits, and close investment holding companies, will go ahead.
From 1 April 2023, the 19% rate will apply to the first £50,000 of profits and a marginal rate of 26.5% will apply to any excess up to £250,000 (£50,000 @ 19% + £200,000 @ 26.5% = £62,500 = £250,000 @ 25%). The 19% rate will not apply to close investment-holding companies. So, for close investment-holding companies and companies with profits of more than £250,000, the rate of corporation tax will be 25%. (Note, however, that the 19% rate can apply to a property letting company with profits of up to £50,000.)
- Advisers should always seek to be at the heart of planning for SME owners in relation to their business and personal tax planning. These changes will offer great opportunities to collaborate with the client’s accountant, opening a broad discussion around remuneration and other profit extraction strategies, as well as sale and succession planning.
- Deductible contributions to registered pension schemes and relevant life policies will become even more attractive, providing greater advice opportunities.
- Companies looking to dispose of chargeable assets within the next few years should consider bringing forward the date of the disposals to before 1 April 2023 to benefit from the lower rate.
There were no fundamental changes announced in the Autumn Statement in relation to IHT, although the nil rate band and residence nil rate band will now remain frozen at £325,000 and £175,000 respectively until the 2027/2028 tax year – so a further two years. This will no doubt mean that more and more individuals will be brought into the IHT net, so planning in this area is likely to become of more importance. Remember that the residence nil rate band is tapered by £1 for every £2 where the total estate exceeds £2m, so individuals ought to consider their own circumstances and consider whether they can plan to prevent any lost residence nil rate band.
- From a general IHT planning perspective, the primary starting point for anyone who is wishing to carry out IHT planning is to consider using their exemptions, such as the annual exemption, small gifts exemption, gifts in consideration of marriage, normal expenditure out of income exemption, gifts to qualifying charities, political parties, etc.
- Individuals can also consider making outright gifts either to another individual or via an absolute trust. The gift will be a potentially exempt transfer for IHT and will generally fall out of account once the donor has survived seven years.
- In cases where individuals wish to retain control and flexibility, they could consider setting up a discretionary trust. However, to ensure no lifetime IHT is payable, the individual can only settle up to their available nil rate band, taking account of any chargeable lifetime transfers in the seven years prior to creating the trust. Remember that a discretionary trust is subject to the ‘relevant property regime’, so exit (when capital is appointed out of the trust) and periodic (ten-year anniversary) charges apply. Although, in practice, with careful planning it is possible to mitigate these charges.
- There are also a number of other types of trusts that are widely available for IHT planning purposes, which can be used where the individual may wish to retain access if they require, for example, a loan trust and a discounted gift and income trust. Advice should be sought to determine which (if any) of these options are likely to be suitable.
- Those who have received an inheritance within the last two years could consider entering into a deed of variation, provided all of the relevant conditions are satisfied. Broadly, the variation must be made within two years of death, it must be in writing, it must contain a statement that Section 142 of the Inheritance Tax Act 1984 applies and it must not be for consideration.
Investing in a pension is a tax-efficient way of saving for retirement and also provides other tax benefits, as illustrated above. Therefore, it is vital for individuals to maximise pension contributions where possible.
- The carry-forward rules allow unused annual allowances to be carried forward for a maximum of three tax years. Thus, 5 April 2023 is the last opportunity to use any unused allowance of up to £40,000 from 2019/2020.
- Those caught by the tapered annual allowance, with sufficient carry forward, may be able to make additional pension contributions to reinstate their full annual allowance for tax year 2022/2023 by reducing their threshold income to £200,000. This would mean that more pension savings may be possible.
- Pension contributions can also help families recover their child benefit, which is progressively cut back if one parent or partner in the household has income of more than £50,000 in 2022/2023 and 2023/2024. Child benefit is totally lost when income reaches £60,000 in 2022/2023 and 2023/2024.
- Individuals could consider making a net pension contribution of up to £2,880 (£3,600 gross) each year for members of their family, including children and grandchildren, who do not have relevant UK earnings. The government will add £720 basic rate tax relief. Such payments would normally be gifts for IHT unless covered by an exemption.
For all individuals, it is important to consider making use of tax-efficient investments where possible.
Individual Savings Accounts
The maximum ISA subscription limit is £20,000. This means a couple could, between them, invest £40,000. A child aged 16 or 17 can invest £20,000 in a cash ISA in 2022/2023 and 2023/2024.
While no tax relief applies on an ISA subscription, income and capital gains within the ISA are free of tax. This means that for those whose dividend income could exceed their dividend allowance of £2,000, decreasing to £1,000 from 6 April 2023, tax freedom on dividend income within the ISA will save tax.
Where a spouse/civil partner has died during the 2022/2023 tax year, owning an ISA, it is advisable to check whether an additional ISA allowance exists.
Growth-oriented unit trusts/OEICs
Rates of income tax are higher than the current rates of CGT, so it can be advisable, from a tax perspective, for a higher/additional rate taxpayer to invest in collectives geared towards capital growth as opposed to income. This would enable the individual to make use of their annual CGT exemption on a later encashment.
Single premium investment bonds
Bonds (onshore or offshore) are non-income producing investments, so are useful investments to defer tax payable by use of the 5% cumulative allowance. This can be valuable for a higher/additional rate taxpayer, especially where they are likely to pay a lower rate of tax in the future.
Enterprise Investment Scheme (EIS)
For tax year 2022/2023 and 2023/2024, an investment of up to £1m or £2m (provided anything above £1m is in knowledge-intensive companies) can be made to secure income tax relief at 30%, with tax relief being restricted to the amount of income tax otherwise payable by the investor in that tax year. The relief can be carried back to the previous tax year. In addition, unlimited CGT deferral relief is available, provided some of the EIS investment potentially qualifies for income tax relief. Although investors considering deferral should remember that CGT rates may increase in the future.
Venture Capital Trust
The VCT offers income tax relief for tax year 2022/2023 and 2023/2024 at 30% for an investment of up to £200,000 in new shares, with relief restricted to the amount of income tax otherwise payable by the investor in that year. Dividends and capital gains generated on amounts invested within the annual subscription limit are tax-free, so, again, these investments may appeal to higher/additional rate taxpayers. And, given the decrease in the dividend allowance from 6 April 2023, this could make VCT investments more attractive.
While there are numerous tax planning options that can be considered, approaching the end of the tax year provides a good opportunity to ensure clients have maximised use of the allowances and exemptions available to them. It is also the ideal time to fully review their overall financial planning needs to ensure they are on target to meet any short-term and long- term objectives ahead of the new tax year.
Niki Patel is a tax and trust specialist at Technical Connection