Chancellor, Jeremy Hunt has slashed tax thresholds during today’s Autumn Budget in a bid to fill the £50bn black hole in public spending ahead of.
He announced that the higher income tax threshold will be lowered from £150,000 to £125,140 in April next year, meaning more high earners will have to pay the 45% higher rate of tax.
People earning above the threshold may want to make full use of other tax allowances by allocating their cash towards their pension or ISA, according to Chris Liebetrau, financial planner at Nutmeg.
The other bands were kept frozen, meaning people earning between £12,571 to £50,270 will pay a tax rate of 20%, while those with an income of £50,271 to £125,140 will be taxed at 40%.
Hunt also announced changes to the capital gains tax (CGT), with the allowance shrinking from £12,300 to £6,000 from April. The threshold will halve again to £3,000 in April 2024.
Likewise, Hunt also announced that the dividend tax threshold will drop from £2,000 to £1,000 in April, with an additional drop to £500 in April 2024.
It means that investors receiving income through dividends (that do not have their holdings in a tax wrapper such as an ISA or pension) will have less headroom before they start to pay tax.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, reiterated that investing through ISAs and pensions is the best way to shield savings against capital gains and dividend tax hikes.
She said: “This rise is a stark reminder of the value of ISAs in protecting investors from having to consider CGT or dividend tax, so anyone who hasn’t exploited their ISA allowance to protect these investments may be inspired to do so.”
The chancellor’s tax moves may be unpopular with high earners but could help reduce the UK’s soaring inflation problem – the Office for Budget Responsibility (OBR) forecast inflation for this year would be 9.1% while this would fall to 7.4% next year.
Next year, the consumer prices index (CPI) is forecast to reduce to 3.8% by the third quarter of 2023, down from the current rate of 11.1%, but still above the Bank of England’s (BoE) target of 2%, which it expects to reach by the second quarter of 2024.
However, the OBR predicted that real household disposable income per person will continue to fall by 4.3% next year and 2.8% in 2024.
It suggested that the UK recession could have already started, with output down 2.1% over the third quarter, although it expects growth to pick up by 1.3%, 2.6%, 2.7% and 2.2% over the next four years.
There was some good news however, particularly for pensioners. Hunt also announced a 10.1% increase to state pension payments as of April next year in line with September’s inflation figures.
Those who reached pension age after April 2016 will have their weekly payment increase from £185.15 to £203.85.
Pensioners who reached retirement age after that date will have their payments upped from £141.85 per week to £156.20.
The chancellor also maintained the triple lock, which ensures that the state pension will increase each year in line with the higher of inflation, wages or 2.5%.
There was also some relief to those worrying about rising energy bills, which have been one of the biggest contributors to inflation in the UK.
After coming into office, prime minister, Rishi Sunak reduced the Energy Price Guarantee from two years to six months, but Hunt has extended the programme beyond the winter and increased the cap from £2,500 to £3,000 in April.
He also increased the windfall tax on energy companies benefiting from higher prices through the Energy Profits Levy, which he upped from 25% to 35% and placed a 45% levy on electricity generators from the start of next year.
With energy companies making record high profits on the back of heightened demand, the government estimates that the combined increase to these taxes will contribute £14bn to filling the spending gap.
In an effort to secure energy independence following Russia’s invasion of Ukraine, the chancellor also committed to building a new nuclear power plant in Suffolk, spending £700m on initial contracts.
The chancellor also increased spending on the NHS and social care, investing £1bn and £1.3bn towards them respectively next year.
Neil Birrell, chief investment officer at Premier Miton, said: “The chancellor is clearly looking to the long-term in trying to fix public finances, but the short-term is what it is all about, and that remains problematic.”