“Everybody’s Going to Pay More Taxes After the Fall” was a major spoiler from Jeremy Hunt before the event, and so it was passed with a tax creep that didn’t result in real winners in the cost-of-living crisis.
So what happens with income tax?
After the market chaos caused by the now-unwanted Kwasi Quarting budget tax cuts, Hunt becomes a consultant in “stealth” mode, with actions such as freezing tax limits to raise taxes.
In the Spring 2021 budget, then-Chancellor Rishi Sunak placed a four-year freeze on personal tax thresholds that began in April this year. Over time, this leads to more low-income households paying base rate tax (up to £12,750) and those with incomes close to £50,000 to the higher 40% rate. Hunt has now gone even further, by prolonging this deep freeze by an additional two years, which means no change in thresholds until 2028.
As expected, Hunt left the three main tax rates unchanged – 20p base, 40p top and 45p additional rate – with the first £12,750 income tax and a 40% rate starting at £50,270.
He did, however, He cut the £150,000 minimum at which Britons start paying the top rate of income tax 45p to £125,140 – a measure that would drag 250,000 people up to the top rate. For someone earning £150,000, the change would mean they would pay an extra £1,243 in income tax per year.. (Note, income tax rates and thresholds in Scotland are set by the Scottish Parliament.)
Freezing allowances results in what an economist calls ‘fiscal drag’, a term describing the subtle process of drawing more Britons into paying income tax and causing others to pay a higher rate.
It’s a profitable measure in the current climate where wages are rising in response to rising inflation. When the four-year freeze was announced in 2021, the Treasury predicted the scheme would raise £8 billion a year by 2026. But with inflation at a 41-year high, the Institute for Fiscal Studies (IFS) now believes that figure It will be a whopping £30 billion a year by 2026.
On an individual level, if a person earns £51,000 and receives an annual salary increase of 3%, without adjusting allowances and personal thresholds for inflation, the individual will have paid an extra £8,632 in income tax after six years, with their annual tax bill rising from 8,444 £1 this year to £11,791 in tax year 2027-28, according to consultancy Blick Rothenberg.
Remind me: What happens to National Insurance?
This year’s National Insurance Hockey Cookie was a major concern for payroll departments across the country. However, one of the few decisions Kwarteng made that stands is his reversal of the National Insurance hike in April.
In 2021 Boris Johnson’s government decreed that NICs would rise by 1.25p to the pound in April this year to improve funding for the NHS and social care. Ministers agreed to raise the key NIC rate for employees from 12% to 13.25%, while employers were required to pay 15.05%.
However, the short-lived Liz Truss government reversed the increase, with the NI rate slipping to 12% on November 6. It is paid at this rate by staff earning between £12,570 a year and just over £50,000 a year. Above that level, the rate fell from 3.25% to 2%. Most employees will start receiving pay cuts this month, though some workers may have to wait until December or January.
This shift, combined with the summer decision to increase the minimum tax (from £9,880 to £12,570 a year), means that the average worker’s NIC bill is down by around £500.
Are they coming for my inheritance?
Inheritance tax is an emotional topic. It is payable at 40% on properties over £325,000 for an individual and £650,000 for a couple. This increases by £175,000 per person to a tax-free maximum of £1 million per couple if the home is endowed to children or grandchildren. The government has extended a freeze on these rates for another two years until 2028, so more people will have to pay them. This is particularly important for families dealing with property in London and the South East where house prices are some of the highest in the country.
And what about capital gains tax?
Capital gains tax is imposed on the sale of assets such as stocks and second homes. High rate taxpayers pay 20% on dividends and securities and 28% on residential property – more than the annual tax break allowance of £12,300. Hunt reduced next year’s allowance to £6,000, meaning whoever paid the highest rate would pay an extra £1,764 in taxes. This allowance will be reduced again to £3,000 in April 2024, which means an additional £2,604 compared to the current situation.
Were there winners?
The two million minimum wage workers got what Hunt described as the “biggest increase ever” to their paychecks. It’s now £9.50 an hour for adults aged 23 or over, and this will jump by about 10% to £10.42 next year.
There was also good news for pensioners struggling with the high cost of living. Under the so-called ‘triple lock’, the state pension is supposed to rise each year in line with which of these three measures is the highest: inflation, as measured by the consumer price index, average wage increase across the UK or 2.5%.
There were fears that the Conservatives would back down from this extravagant pledge, but the chancellor confirmed that next April the state pension will rise in line with the September inflation rate of 10.1%.
This means pensioners will earn £204 per week from April 2023, up from £185 this year, which works out to an annual increase of £973, bringing their total income to £10,600.
Hunt also confirmed that interest tested, including universal credit, would rise in line with the September inflation figure from next April. The move would mean 10m working-age households got a “much-needed boost”, with the average family on Universal Credit getting £600 better off. Hunt also raised the benefit cap in line with inflation.
I Run My Own Business – How Has The Budget Affected Me?
Many small business owners often pay themselves a dividend out of their corporation’s profits because this is usually more tax efficient. Like other share holders, they can receive up to £2,000 in dividends a year before paying dividend tax at three levels: 8.75% for taxpayers at the base rate, 33.75% for the top rate, and 39.35% for the additional rate.
Hunt kept the rates the same, but halved the exemption allowance for the next year to £1,000 and trimmed it to £500 in 2024.
This is also bad news for small investors who supplement their income by investing in the stock market. The primary taxpayer will have to hand over a further £87.50 next year and £175 the following year.
How about helping solve the cost of living crisis?
This year’s government support package provided energy billpayers with a £400 grant, while 8 million households on income-tested benefits received a cost-of-living sum of £65, with £150 and £300 available for disabled individuals and pensioners.
Hunt said the Government’s Energy Price Guarantee (EPG), which sets typical energy bills at £2,500 this winter, will continue to provide support from April 2023 when the cap rises to £3,000. With energy prices expected to continue to rise over the next year, Hunt said this would save all households £500 per home in energy costs.
There will be no universal bill support next year, as the new cost-of-living package targets retirees and low-income families. Those on tested benefits will receive £900, pensioners will receive £300 and those on disability benefit will receive £150 in the financial year starting in April 2023.
What do experts say about the changes?
This budget was short of good news for Britons struggling with rising food, energy and borrowing costs. The chancellor is also facilitating a 5% council tax increase in a bid to boost her finances which will put more pressure on family budgets next year.
Genevieve Morris, head of corporate tax at Blick Rothenberg, called it budget “The frog boils.” “The constant freezing of the taxa means that most people won’t notice it directly as the temperature rises, and so they won’t jump out of the water. They will simply discover years after boiling.”
Paula Bejarano, an associate economist at the National Institute of Economic and Social Research, said the chancellor had announced an “effective tax increase for everyone”. “With the latest ONS data showing that real wages fell by 2.6% over the year, we had hoped that the chancellor would not implement this policy at the bottom line – because it would further strain already existing budgets due to the cost of living crisis.”
Did Hunt pull any rabbits out of the hat?
Looks like the treasury can’t keep rabbits anymore…