What could individuals expect in the Autumn Statement?

On 17 November 2022, our Chancellor of the Exchequer, Jeremy Hunt, will deliver an Autumn Statement. With “difficult decisions” to be made and “those with the broadest shoulders” likely to be impacted the most, what could this mean for individuals? We are seeing increasing speculation in the media with different options being considered. Which ones do I think are likely???????????

The simplest way to raise tax revenues would be to be increase the basic rate of income tax. In 2021/22, HMRC raised total tax revenues of c￡716bn of which income tax accounted for ￡393.9bn - over half. Could we see a return of the 50% top rate of income tax? It has, however, been reported that the Government do not want to break their Conservative Party 2019 Manifesto pledge not to raise income tax rates. Increasing the basic rate of income tax will have a disproportionate affect on those with lower incomes, which given the cost of living crisis, is likely to be unpopular. In my view, changes to income rates are unlikely.

We should not forget that in the March 2021 Budget when now Prime Minister Rishi Sunak was Chancellor, he announced a number of measures that came into effect this tax year. Both the personal allowance and tax bands were frozen for 4 years from 6 April 2022. According to the Red Book over 2.3m taxpayers may be impacted by these measures with over 1m of low earners being brought into the tax net by 2026. This means that those that are currently earning close to ￡12,570 (the current tax free personal allowance that is also being frozen until 2026) have now started to pay income tax on their wages above this threshold with the excess being taxed at 20%. In a high inflation environment with wage increases, this should not be ignored. As with all measures of this type, it is always those at the “cliff edges”, i.e. those on the tipping point of each band who are most hit so in this case those earning ￡12,570, ￡50,270 and ￡150,000. The Office of Budget Responsibility (OBR) have estimated that the cost to a higher rate (i.e. 40%) taxpayer could be as much as ￡734 per year by 2026.

Labour peer Lord Sikka led a short debate on 25 October 2022 in the House of Lords asking whether the Government has any plans to equalise the taxation of earned and unearned income. Lord Sikka commented that he finds it unfair that a worker on ￡30,000 a year currently pays ￡3,486 in income tax and ￡2,092 in national insurance – a total of ￡5,578 – while a ‘speculator’ with ￡30,000 of capital gains pays no national insurance and pays only ￡1,770 in capital gains tax meaning that earned income suffers ￡4,000 a year more in taxes than unearned income. Viscount Younger of Leckie, a Conservative Lord peer responded: “The Government are committed to a fair tax system in which those with the most contribute the most, but one which also has to encourage saving. The income tax system, we believe, is highly progressive: the top 5% are projected to pay half of all income tax in 2022-23.”

What could this mean? We could see a change to the scope of national insurance contributions. Recent announcements have seen increases to national insurance being abolished with effect from earlier in November and the introduction of the Health and Social Care Levy, which would have included those above state pension age is no longer going ahead in April 2023. ?This was originally introduced when Rishi Sunak was Chancellor, however, so we should not rule out a reinstatement of the levy.

The 1.25% increase to the dividend tax rate in order for “…those with dividend income, like business owners and investors, will be making a contribution in line with that made by employees and the self-employed on their earnings…” as the then Prime Minister, Boris Johnson, announced has remained. The dividend tax rates are currently 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. Perhaps a national insurance equivalent could be extended to other unearned income such as rental profits? We could see the UK borrowing tax ideas from other countries such as a dividend surcharge for the wealthy. The tax-free dividend allowance and tax-free dividends received through ISAs also seem under threat.

Wealth taxes are never far away from?speculation. In fact Dan Carden MP, submitted a question for Treasury on 25 October asking “what assessment he has made of the potential merits of the recommendations of the UK Wealth Tax Commission's report published on 9 December 2020”? The response on the 2 November which was under our current leadership was fairly short: “The Government has no plans to introduce new taxes on wealth. The Government keeps all tax policy under review.”?This does not appear to rule out reform to existing wealth taxes, i.e. capital gains and inheritance tax.

A reform of property taxes such as the abolition of business rates and the introduction of a land value tax have been debated for a number of years. This would be a significant change to how property is taxed with the burden moving from the occupier to the owner so would need careful consideration. A land value tax would need valuations of all land which would be a time consuming and challenging undertaking. Not one for the short term but perhaps something for longer term capital reform. Inheritance tax is not a significant revenue raiser so reform is likely to be politically driven again not one for the short term but perhaps on the medium to long term agendas.

It has been widely reported in the media that the Treasury are considering an increase to capital gains tax rates. If they do increase rates, will they align with income tax rates, i.e. 45% or might they choose a rate in-between, such as 30%? Will any rate increase be effective immediately or will they pre-announce a rate increase like in Alasdair Darling’s time as Chancellor in October 2007.

Present day CGT receipts have risen to higher revenue levels, reaching ￡11.1bn in 2021/22. However, while this is a higher absolute number, CGT now only represents 1.5% of total tax receipts compared to more than 5% in 2007/08, suggesting that a rate increase (for CGT at least) when pre-announced could lead to be a temporary increase in tax revenues that are sustained in the medium term.

Against this, however, must be balanced the impact of the Laffer curve which suggests increases in tax rate can give rise to lower economic activity and therefore a lower overall tax take. This is particularly important at a time when the economy is fragile and likely to be sensitive to any additional shocks.?The Adam Smith Institute argue that a sudden tax increase of this nature leads to a sudden fall in CGT revenues as taxpayers change their behaviour and hold on to assets – one of the characteristics of CGT is that taxpayers often (but not always) have a choice about the timing of the disposal.?So, for all those who rush to dispose of assets ahead of any possible tax rise, there will be others who choose to hold onto their assets, hoping to ride out any rise in capital gains tax rates and waiting for a fall in future. This would be particularly unwelcome at a time when asset values are already depressed by the uncertainty caused by world events.

Under current rules, capital gains on residential property and carried interests carry a higher rate of CGT at 28%. So perhaps rather than increasing capital gains tax on all assets, the Government may choose to tax particular assets at even higher rates. With CGT not a significant revenue raiser, however, any changes to the rate are more likely to be more driven by political decisions than any great fiscal contribution.

There has also been media speculation surrounding the taxation of UK resident non-UK domiciled individuals known as ‘non-doms’. At the moment, those who are domiciled outside the UK but living here, can benefit from the remittance basis - a special tax regime where they only pay tax on overseas income and gains to the extent that they are brought to, used or enjoyed in the UK. Non-doms used to be able to benefit from the remittance basis for as long as they were living in the UK. This was shortened to 15 years in 2017. Some press speculation suggest that the regime could be abolished entirely. ?This could put the UK at a competitive disadvantage as a number of countries have a beneficial tax regime for a fixed period of time to attract people to live there. A perhaps more likely alternative suggestion is that the regime would be shortened from 15 years to 5 years which has been reported as potentially raising as much as ￡1.6bn per year. Given that non-doms claiming the remittance basis do not need to declare their overseas income and gains, it is difficult to understand how a revenue raising figure could be calculated so I would be somewhat sceptical about the accuracy of the ￡1.6bn additional revenue reported.

Under constant discussion is the cost of higher rate tax relief on personal pension contributions. In some articles this is put at as much as ￡40bn and the number keeps growing. However, pension pots were hit hard in the recent market turmoil and it may be politically difficult to make any tax changes at this time. This is a particularly tricky issue for Chancellor to navigate as they cannot risk any further u-turns on any of their announcements in the Autumn Statement.

So what do we know? There is reported to be a ‘black hole’ in our finances that the Chancellor will seek to fill with a mix of both cuts in spending and increases to taxes. Certain taxpayers are likely to be impacted more than others with windfall taxes on certain companies a hotly debated topic. Individuals will already bear some of the burden with the frozen personal allowance and income tax bands but these measures alone are unlikely to completely fill the deficit. Individuals as well as businesses will need to pay more tax at least in the short term. While it is unclear which taxes the Chancellor will choose to focus on what we do know is that changes to personal taxes is unlikely to give rise to a regime more generous than our current one.