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As the dark, damp November days start to draw in, Chancellor Jeremy Hunt’s Autumn Statement seems oddly appropriate with its stark tax forecast. A contrast to the bright and breezy mini-budget tax cutting exercise in September. This budget with spending cuts and higher tax brings us down to earth with a much darker outlook in the face of impending recession.
The current income tax personal allowance of £12,570 will now remain frozen at this level until April 2028 (rather than 2026 as previously planned).
The threshold for the 45% additional rate tax has been reduced from £150,000 to £125,140. This will also be frozen until 2028.
This means as wages increase to keep up with inflation and cost of living over the next 5-6 years, a larger portion of the wages are taxed. At the higher earner end, more will be taxed at 45%.
The annual exempt amount for capital gains will decrease from the current level of £12,300 to only £3,000 by 2024-25.
Lower thresholds will mean that more gains need to be reported, either because tax is due, or because proceeds are more than 4 times the annual exempt amount.
The current level of £2,000 dividends that can be taken without tax will decrease to only £500 by 2024-25.
The tax-free amount for dividends was put in place in April 2016 when the tax rules for dividends changed. It was seen as a compromise measure at the time and there has been much speculation as to how long it would last.
This is on top of the existing dividend tax rate increases that look place in 2022-23, when all rates of dividend tax increased by 1.25%. The combination of these factors will increase the tax burden for company directors who take the majority of their income in dividends or people who rely heavily on investment income.
This is another freeze that will result in larger employer national insurance bills as wages rise.
Small to medium enterprises will get less generous R&D tax relief from April 2023. The deduction rate for the Research and Development (R&D) SME scheme is being cut to 86% and the credit rate to 10% as an attempt to combat abuse and fraud in R&D tax relief. This is a significant reduction from the current deduction rate of 130% and credit rate of 14.5%.
On the other hand, larger companies have a more positive outlook. Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%. This is the scheme applicable to larger enterprises.
This budget was a painful but necessary exercise to try and combat the national budget deficit and very few taxes are actively going up. But with reductions or freezes to tax free or exempt amounts, in the face of a recession and cost of living crisis, it’s still a chilly proposition.
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