New Tax Year, New Tax Rules
The new tax year is now well underway and while there has been one welcome change on the income tax front, most of the numbers look all too familiar.
And freeze…
Back in March 2021 the then Chancellor and now Prime Minister, Rishi Sunak, announced that for 2021/22 he would be increasing income tax allowances and bands (outside Scotland) in line with inflation (then a modest 0.5% to September 2020) but would subsequently apply a freeze until April 2026. At the time it did not seem a big deal – freezing allowances and thresholds was a standard Treasury trick to squeeze out some more revenue and, with inflation so low, it was not much of a squeeze anyway.
And then…
Inflation took off and what had looked like a minor tax rise loomed ever larger. To add to the taxing pain, in the wake of Liz Truss’s mini-Budget, Jeremy Hunt used his Autumn Statement 2022 to add another two years to the freeze, meaning that it would last through to the end of 2027/28. In addition, he chose to:
Reduce the dividend allowance to £500 in 2024/25 (from its then £2,000);
Cut the capital gains tax annual exemption from £12,300 to £3,000 over the same period; and
As the coup de grace, slash the starting point for additional rate tax (top rate in Scotland) by nearly £25,000 from 2023/24.
The national consequences
In its Economic and Fiscal Outlook report accompanying March’s Budget, the Office for Budget Responsibility (OBR) provided a good summary of the impact of these freezes.
The big jump in the number of higher rate taxpayers combined with the effect of the cut and freeze in the additional rate threshold means that by 2027/28 more than one in five taxpayers will be paying more than basic rate.
The personal consequences
The impact of this tax standstill is becoming more apparent:
Some people whose only income is their state pension have suddenly found themselves liable to tax for the first time.
A growing number of people with dividend income, whether from collective investments or direct shareholdings, also have a new tax liability.
Higher interest rates and a frozen personal savings allowance (£1,000 for basic rate taxpayers, £500 for higher rate taxpayers) have similarly created fresh tax bills on savings income.
Wage increases are proving less beneficial for those who have moved into higher tax bands.
The one piece of good news
The Budget did increase one tax threshold, the adjusted net income threshold at which the high income child benefit charge (HICBC) starts to bite. This had been fixed at £50,000 since its introduction in 2013 and, with indexation, would have been about £70,000 in this tax year. Instead, the Chancellor increased the trigger to £60,000 and doubled the band over which the HICBC operates to £20,000 (i.e. from £60,000 to £80,000). The result is that 1% of child benefit is lost for each £200 of income over £60,000.
If your clients were caught by the HICBC in the last tax year, check their position in 2024/25. Unless their income exceeds £80,000, they will be better off. BUT if they stopped child benefit payments – as many caught by 100% HICBC did - they will need to restart them as soon as possible to benefit.
The ratchetting up of tax makes tax planning all the more relevant. Sometimes it is possible to achieve meaningful savings by relatively simple changes, but at other times complexity is unavoidable.