What the Autumn Statement could hold for personal finances

interactive investor experts offer their views.

With the Autumn Statement less than a week away (17 November 2022), interactive investor’s Myron Jobson, Senior Personal Finance Analyst and Alice Guy, Personal Finance Expert, give their views on the measures that could feature.

Among the topic areas explored in this release are: capital gains tax, dividendtax, state pension and pension tax relief and fiscal drag (the potential extension of the freeze on income tax, national insurance, pensions lifetime allowance and inheritance tax nil-rate band thresholds to April 2028).

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Tax-free investing crackdown?

Rise in capital gains tax

Alice Guy, Personal Finance Expert, interactive investor, says: “Raising capital gains tax to 40% rather than a current headline rate of 28% would mean that a taxpayer who bought a second property for £200,000 and sold it for £300,000 would pay an extra £12,000 tax. That’s a particularly gloomy scenario, and one which we hope does not play out. But it does highlight the scope for unintended consequences.

“The proposed hike, combined with a freeze of the annual allowance and spiralling inflation, means that a tax originally intended for the very rich will hit more ordinary taxpayers in the future.

“Increasing capital gains tax runs the risk of a potential mass exodus of buy-to-let landlords. There is real danger of a rental crisis, as rumours of capital gains tax hikes, coupled with rising interest rates could encourage more buy-to-let landlords to sell up. Fewer rental properties available would make it harder for renters to find an affordable home for their families.”

Changes to dividend tax

Myron Jobson says: “Let’s hope the Autumn Statement isn’t a painful fiscal event for investors. As well as a potential rise in capital gains tax, dividend tax, payable on dividend earnings of above £2,000 per year, could also be in the firing line to raise more funds for the public kitty. Having remained at £2,000 for the past five years, where previously it was £5,000, the latest whispers from Whitehall suggest that the threshold for dividend tax could be lowered – meaning more people will be liable to pay the tax.

“This would hit those who have income investment held outside an ISA. Rumoured changes to dividend tax is a timely reminder of the benefits of investing through an ISA, which comes with a generous annual allowance of £20,000. Now may be a good time for investors to think about Bed and ISA applications, and a number of our customers are utilising this facility.It means selling and buying back shares, which could trigger a capital gains tax implications, but it is good way to fund your ISA using your existing investments – particularly helpful in a cost-of-living crisis where some people may have less ‘new’ money to commit.” 

State pension and pension tax relief

Alice Guy says: “Tinkering with the pensions system could force an already creaking pension system to its knees. Many European countries have a much more generous state pension system where final payments are based on almost 50% of average wages. In contrast the UK state pension is a two-tier system with a small flat state pension, supplemented by workplace and private pensions, which are boosted by tax relief. There is a danger that reducing the attractiveness of pension saving will leave the next generation struggling to save enough for their retirement.

“If the state pension triple lock is scrapped or pension tax relief is reduced, then there is a risk that the UK state pension system could become one of the worst in Europe.

“Reducing pension tax relief would disproportionately affect private sector workers, most of whom don’t have a guaranteed defined workplace pension. They rely on pension tax relief to help them build up enough wealth for a comfortable retirement.”

Fiscal drag

Rumour: the government could extend the freeze on income tax, national insurance, pensions lifetime allowance and inheritance tax (IHT) nil-rate band thresholds until April 2026 to April 2028.

Myron Jobson, Senior Personal finance Analyst, interactive investor, says: “Freezing various tax thresholds and allowing inflation to drag workers into higher tax brackets is the oldest trick in the book to get tax pounds to plug the colossal hole in the public finances. It is a less controversial strategy when real wages are on the up, but amid the biggest fall in living standards in generations, with the Bank of England warning that the UK is facing its longest recession since the Great Depression a century ago, it is a tough pill for workers to swallow.”

Inheritance tax threshold has reduced by £140,000 in real terms

• The Inheritance tax (IHT) £325,000 threshold, introduced in 2009, would be worth £464,643 in today’s money if uprated every year in line with inflation.

Myron Jobson says: “IHT is no longer a tax on the wealthy as meteoric house price growth and strong stock market performance over the past few decades has dragged an increasing number of estates into the IHT net. Fiscal drag means the IHT threshold has reduced by £140K in real terms. The residence nil rate band, introduced in April 2017, offsets some of the impact of fiscal drag but it only benefits homeowners with children or grandchildren. This additional IHT allowance of £175,000 can be claimed where the family home is inherited by children or grandchildren.”

Pension lifetime allowance has more than halved in real terms

• Inflation since 2006, when the cap was introduced, means that £1,500,000 (the original cap) would now be worth £2,322,583 in today’s money.

Alice Guy says: “Freezing the lifetime allowance at £1,073,100 would make it more difficult for pension savers to achieve a comfortable retirement. Inflation since 2006, when the cap was introduced, means that £1,500,000 (the lifetime allowance in 2006) would now be worth £2,322,583 in today’s money. That means the lifetime allowance has more than halved in real terms since it was introduced in 2006.

“A private pension pot of £1,073,100 would give someone a pension income of around £32,193 per year if they withdraw 3% per year from their pension. It’s a relatively modest amount and is only around the current average salary in the UK.”

Myron Jobson says: “The worry is pension savers who have been kicked around like a political football, will miss out on valuable tax relief by deciding not to save more into their pensions in fear that they might exceed the LTA limit.”

What it could mean for income tax and national insurance

• Using inflation forecast from consultancy group EY, interactive investor calculates that a worker on £30,000 would pay an additional £1,919 in tax between the current tax year and the end of the 2027-28 tax year if income tax and national insurance tax thresholds remained unchanged. More information can be found here.

Myron Jobson, Senior Personal finance Analyst, interactive investor, says: “Everyone will be paying more if the income tax and national insurance thresholds remain frozen until 2028, but the fiscal drag hits some taxpayers harder than others. Our calculations show that top earners with a salary of £150,000 face paying an extra £14,624, while a worker earning £30,000 a year could pay £1,919 more in tax. Those earning £20,000 could see their tax burden massively increase from 12% to 15% of take-home pay (an extra £1,267 in tax).”

Bitter cocktail of stealth tax cuts and spending cuts on the card

Myron Jobson says: “The government has already put out feelers to gauge public reaction to potential measures before it dots the i's and crosses the t’s on its economic plan to get the UK economy back on an even keel. No one said balancing the books was going to be easy, and it is becoming increasing likely that a bitter cocktail of stealth raids on taxpayers and spending cuts will be announced at the fiscal event. But many will be hoping for some sweeteners to make the make the grand economic plans palatable.

“Plans for low-tax investment zones to boost UK economic growth could be taxed or pared back significantly as part of cost-cutting measures, potentially retaining up to £12 billion in tax revenues a year, and all eyes will be anxiously on the levelling up agenda.

“When it comes to sweeteners, the government could move to ease the plight of first-time buyers. Even with the recent cut to stamp duty, things don’t seem to be getting easier for most first-time buyers, as rising mortgage rates and sky-high house prices have forced many to give up on their dream of home ownership for now.  

“The closure of the Help to Buy equity loan scheme last month does not help matters. While not a roaring success, it offered more than 361,000 a route on to the property ladder. As Help to Buy disappears from view, first-time buyers would hope for a replacement initiative to take its place in the coming months to ease the plight of first-time buyers – the key will be to help first-time buyers without fuelling more runaway house price inflation.”