UK budget: In the bleak midwinter
By Alexandra Hewazy, Barclays Private Bank
Please note: The article does not constitute advice or any form of recommendation. Barclays Private Bank does not offer tax advice, and professional advice should always be sought.
A cold dose of economic reality was served up in the UK today, with the Autumn Statement unveiling a series of tough fiscal measures. They equate to £24 billion in tax rises over the next five years, and £30 billion in spending cuts. The budget announcement came a day after reports that UK inflation hit 11.1%1 in October, representing a 41-year high.
The government also confirmed that the UK had entered a recession. The severe strain being felt across public finances, and in households, points to a tough winter ahead.
An unenviable task
Faced with harsh global economic challenges, and in the aftermath of his predecessor’s mini-budget catastrophe, Chancellor Jeremy Hunt was never going to be the bearer of good news.
Further adding to the air of inevitability was the fact that a number of his pre-Statement press interviews had planted the message, “we are all going to be paying a bit more tax, I’m afraid2.
Against that difficult backdrop, this is what the Autumn Statement means for the areas we’ve commented on in recent articles. There is of course wider context and a degree of complexity that we can’t do justice to in this short article. For now, these are high-level talking points:
Income tax, National Insurance and energy bills
Income tax is one area that illustrates the full extent to which Rishi Sunak’s government has stepped away from the sweeping tax cuts promised in the Truss era.
The result is a decision to freeze the threshold at which the basic tax rate kicks in at £12,571, as well as the higher tax rate threshold at £50,271 (until 2027/28). On top of that, the Chancellor has lowered the threshold at which the top rate of tax is now paid, from £150,000 to £125,140. Collectively, it means that more people will be swept up at either end of the tax scale, resulting in more money flowing into the public purse.
National Insurance is another area experiencing a freeze, with the company rate set at 13.8% for employees on £9,100 or more, annually. There was further difficult news for businesses with the VAT threshold frozen at £85,000 until 2026 (adding an extra two years to the initial endpoint of 2024).
Meanwhile, soaring energy costs – a significant fallout from Russia’s invasion of Ukraine – continue to force the government’s hand. Liz Truss’ pledge to cap household bills at £2,500 has been reigned back, with the cap now rising to £3,000 from April. The government has also indicated that future support will be scaled back even more, with only the poorest households likely to receive help.
Running parallel with household energy support pledges, came the news that oil and gas companies face an enormous (albeit temporary) 35% windfall tax on profits from UK operations. As well as raising funds, the decision potentially softens voter agitation at a time when energy firms are seen to be doing very well during a cost-of-living crisis.
Inheritance, pensions, dividends and capital gains
For wealth holders, wealth inheritors, and investors, HMRC will soon be taking a bigger slice of the pie.
For pension savers, the lifetime allowance of £1,073,100 is frozen until 2027, representing another so-called ‘stealth tax’ whereby the threshold hasn’t risen but more people will start to be impacted by it (and in turn, more money will go to the government). Any pension savings above £1,073,100 will be subject to tax at 25% (if taken gradually) or 55% (if taken as a lump sum).
The freeze on the inheritance tax nil rate band of £325,000 has also been extended from 2026 to 2028.
Meanwhile stock market investors will find themselves having to cough up more, as the tax-free dividend allowance will drop to £1,000 from April 2023 (currently it is £2,000). It will be halved again in April 2024, when it’s taken down to £500.
There’s a similar story for capital gains tax (CGT). The annual exempt sum has more than halved, falling to £6,000 from April 2023. It will be halved again from April 2024 when it drops to £3,000.
Stamp Duty Land Tax (SDLT)
A rare survivor of Kwasi Kwarteng’s notorious mini-budget came in the form of the SDLT cut. As a reminder, Mr Kwarteng moved the SDLT threshold up to £250,000, meaning anything below that level is exempt from SDLT. It only applies to those buyers who are not subject to overseas or second home surcharges.
Despite that decision avoiding the chop today, it will start being phased out from March 2025.
Lastly, the planned increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go ahead. It was previously reversed by Mr Hunt’s predecessor.
A harsh reality
It was just under a month ago when we last wrote about the UK’s rapidly-changing fiscal policies and U-turns (Orthodoxy returns). The government now finds itself stuck in the middle of competing priorities - shielding households from the worst of the pain, and repairing battered public finances.
There’s no denying that many aspects of the Autumn Statement are difficult for UK households. While the government was at pains to say it wants to help the most vulnerable citizens, squeezed budgets will be stretched further, as energy price support is reigned back and taxes rise.
Mr Hunt will be hoping he’s done enough to demonstrate economic competence and restore investor confidence. But more importantly with the electorate in mind, Rishi Sunak will be hoping his Chancellor has put the UK on a stronger economic footing over the long term.
If the war in Ukraine were to stop, and if global inflation were to ease off, conditions (and budgets) this time next year could look very different. But those are two huge ‘ifs’, and other global factors are also at play.
In the meantime, a tough winter looms and a ‘frosty wind may moan3’, along with a large portion of UK taxpayers.
(Please note: Our exclusive Outlook 2023 report features a separate article on the UK’s economic prospects, entitled UK buckles up for storms ahead)
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