It goes without saying that it has been a tumultuous year witnessed by one extreme event after another. And that is before any reference is made to British politics with three Prime Ministers and Chancellors holding office in as many months. It can all feel somewhat chaotic.
In respect of the recent Autumn Statement, it didn’t take a rocket scientist (which I’m not) to expect some tax raising measures. It was always going to be a tricky balancing act for the new Chancellor between stabilising public finances, calming the markets, bringing down inflation and trying to fill up the government’s coffers by raising tax revenue.
Basically, what we got was a reverse of the unfunded tax cuts announced by the previous incumbent. So, instead of £45 billion of tax cuts we have approximately £22 billion of tax increases and £19 billion of spending cuts coming through over the next few years.
Within this, a key part of the government’s strategy has been to freeze a number of allowances. So, what is frozen? It’s a bit like looking into the freezer and seeing what is in there and ensuring that they are all being used up!
Perhaps the freezing of the personal and higher rate tax allowances are the most memorable; with these being extended into a “deep freeze” until April 2028. The long and the short of it is that millions more people will fall into the tax net, with many paying higher rate tax for the first time.
Furthermore, the 40% higher rate tax band effectively ends at £100,000 because above this the personal allowance is tapered down by £1 for every £2 over this threshold. The additional 45% rate of tax was not frozen, but instead reduced to £125,140 – a somewhat strange number. This is because this figure is double the personal allowance and has been set at this level to avoid an effective 65% tax rate on £140 of income.
Also, the Inheritance Tax Nil Rate Bands have been frozen until April 2028. This is another “deep freeze”, which is likely to generate quite a bit of money for the government. Plus, not forgetting the quite significant stepped reduction in both the dividend and capital gains allowances over the next couple of years.
It’s tax by stealth which works well for the government. These measures increase the amount of tax taken, but because per se they are not a tax increase, I am of the view that the government does not feel the general public will react too unfavourably towards them.
A key takeaway, where appropriate, is to fill up the tax no brainers such as ISAs and Pensions first and utilise all the available allowances and to repeat this every year. The integration of all these moving parts is becoming even more important and is a key tax saving component when designing a financial planning strategy.
Despite these changes there is still scope to save significant amounts of tax, especially if this is undertaken as part of a regular tax planning strategy. After all, the benefit of saving tax is to have more money in our pockets for spending, to invest or give away.