Tax Update – Autumn Statement 2022

Much of the increase will take effect by ‘fiscal drag’– freezing or reducing allowance and exemptions, thereby ensuring a higher proportion of income is paid in tax – rather than through increases in tax rates.

Most headlines will focus on the fact that the income tax personal allowance, higher rate threshold and the National Insurance thresholds (are already fixed at their current levels until April 2026, and that these will now be maintained for an additional two years until April 2028). For high-net-worth individuals, some of the most relevant changes are as follows:

Personal taxes 

The income tax additional rate threshold will be lowered from £150,000 to £125,140 from 6 April 2023. 

This widely trailed measure will increase income tax by less than £1,250 per annum for current high and additional rate taxpayers.

This also confirms of course that the highest rate of income tax will remain 45% (ie no reduction).

A threshold of £125,140 may appear a little arbitrary; however, it has been carefully chosen. For individuals earning above £100,000, the personal allowance is withdrawn (at a rate of £1 for every additional £2 earned), giving an effective tax rate of 60%. The nil-rate band is fully withdrawn once earnings reach £125,140. Currently, the marginal tax rate reverts to 40% until income reaches £150,000 – from 1 April 2023, the taxpayer will switch straight into the 45% band.

The government will reduce the Capital Gains Tax Annual Exempt Amount from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. 

A number of changes to the capital gains tax regime had been mooted for some time, not least perhaps because asset values have grown dramatically over recent years, in contrast with stagnating earned incomes.

The changes suggested included an increase in capital gains tax rates (currently ranging from 10% to 28%), so as to equalise the top rate to income tax levels. The Office of Tax Simplification (OTS) had previously recommended such a move – together with possible changes to principal private residence relief (although almost all of the changes introduced by Kwasi Kwarteng have now been reversed apart from the removal of the 1.25% Health and Social Care Levy – see below in relation to the SDLT changes), the Chancellor was silent on whether he will carry forward with the proposed disbanding of the OTS.)

However, the much-feared increase in capital gains rates has not materialised and the reduction of Capital Gains Tax Annual Exempt Amount from £12,300 to ultimately £3,000 will only cost the individual taxpayer a maximum of £1,300, which is a welcome contrast with what might have been if capital gains tax rates had increased.

The reduction of the Dividend Allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024

By way of background, for individuals receiving dividends, the first £2,000 of dividends payable are currently tax free, with the excess is taxed at 8.75% for Basic rate (20%) taxpayers, 33.75% Higher rate (40%) taxpayers, and 39.35% for Additional Rate (45%) taxpayers.

The rates for the excess will remain as they are, so again, the change should result in a relatively small increase of £675 at most.

The CGT and dividend tax changes are expected to raise over £1.2 billion a year for the exchequer.

Finally, Pensions tax relief (which is estimated to cost £40bn a year) was surprisingly untouched.

Business Taxes 

The planned increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go ahead as originally planned. 

The main rate of corporation tax is currently 19% but an increase to 25% was originally enshrined in Rishi Sunak’s 2020 budget.

This increase will only apply to companies with profits of £250,000 and over. Small companies with profits up to £50,000 will continue to pay corporation tax at 19%, with profits between these two figures being subject to a tapered rate.

The rate of Diverted Profits Tax – From April 2023, the rate of Diverted Profits Tax will increase from 25% to 31%

DPT is really an anti-avoidance device which primarily affects multinational enterprises seeking to avoid a taxable presence in the UK or engage in transfer pricing type arrangements to exploit tax mismatches. The increased rate of 31% maintains a 6-percentage points differential above the main rate of Corporation Tax (which will be 25%), this ensuring it continues to operate as a deterrent against diverting profits out of the UK.

Real Estate taxes 

Not many changes remain from the previous Chancellor’s short lived growth plan, but Jeremy Hunt has left the changes in residential property SDLT in place – at least until 31 March 2025. However, from 1 April 2025, the nil-rate band will drop back down to £125,000 (from £250,000, with the 2% band (between £125,000 and 250,000) being restored.  In addition, the thresholds for first time buyers’ relief will drop be reduced back to £300,000 and £500,000 (from the increased levels of £425,000 and £625,000 respectively).  What had originally been introduced as a permanent reduction has now become merely another SDLT “holiday”. What the Chancellor has effectively done is move responsibility for the change into the term of the next Parliament.

One change also made in Kwasi Kartengs mini budget back in September was the introduction of ‘Investment zones. These were to be oases of tax relief where SDLT would not apply to land acquired for development, 100% tax relief would apply to plant & machinery purchases, and the first £50K paid to an employee would be employer NIC – free. The future of these is uncertain, beyond a statement to the effect that “the government will refocus the Investment Zones programme to catalyse a limited number of the highest potential knowledge-intensive growth clusters, working with local stakeholders, to be announced in the coming months. The existing expressions of interest will therefore not be taken forward”. It appears that the aim is to combine the concept of Investment Zones with the general aim to boost high-tech businesses in the UK, encouraging them to establish in some of the areas of the country that need the most support.

The Chancellor also made some announcements in relation to business rates. The Autumn Statement sets out a package of targeted support to help with business rates costs worth £13.6 billion over the next 5 years. The business rates multipliers will be frozen in 2023-24, and upward transitional relief caps will provide support to ratepayers facing large bill increases following the revaluation. The relief for retail, hospitality and leisure sectors will be extended and increased, and there will be additional support provided for small businesses.

If you have any questions, or would like to discuss further, please contact Hed Amitai, Philip Alfandary, and Leigh Sayliss.