The Winds of Change are Cold

Published: July 10, 2023

The General Economy

Following Jeremy Hunt’s first budget back in October the changes, or lack thereof, of previous Chancellors will really begin to bite for taxpayers in 2023.  The UK, and global, economy is still recovering from the major impacts of a global pandemic and the ongoing war in Ukraine.  Although we may manage to stave off a technical recession it is likely the UK economy will contract for at least one quarter.  Inflation, the measure which tracks the general price of goods and services over time, remains one of the highest in Europe, threatening to push more people into poverty and erode wealth for those with significant assets.

The Big Freeze

Against that gloomy backdrop the Government issued a budget that placed emphasis on the freezing of allowances and the bands upon which tax is calculated.  This is generally referred to politically as stealth tax in that the policy increases the tax burden generally without having to adjust any of the ‘headline’ rates.

Inheritance Tax

The IHT threshold, long a bugbear of many a tax commentator, continues to be frozen (unchanged since 2009).  Inheritance Tax (“IHT”) is paid at 40% which is one of the highest marginal rates of taxation payable.  If the threshold had increased with inflation it is likely that the Nil Rate Band would now exceed £400,000, and sit around the £450,000 mark.  As a result of the Nil Rate Band being frozen, approximately £125,000 of additional wealth is currently potentially subject to IHT at 40%, a huge £50,000 of extra tax revenue for every estate over £450,000. 

Until the recently announced slight downward shift, the housing market had gone through a period of positive growth, leading to the possibility of more people’s estates breaching the threshold and suffering IHT on the surplus at 40%. That is a lot of siblings, children, grandchildren and other beneficiaries of the taxpayer who will have to suffer the direct consequences of this when they die unless tax planning is carried out to mitigate this in lifetime.  The Residence Nil Rate Band, which provides an additional allowance for homes remaining within the family, has similarly not received any inflationary adjustment.

It is vital that early advice is taken to adequately plan for both retirement and the passing of wealth to children, grandchildren and other beneficiaries. 

Capital Gains Tax

A further threat to the management of wealth comes in the form of a particularly severe reduction in the annual exemption available when calculating liability to Capital Gains Tax.  A reduction from £12,300 per taxpayer to £6,000 has already been enacted and this will further reduce to £3,000 from 6 April 2024.  The overall tax gain from this policy will therefore be significant.

Trustees continue to only benefit from half of this allowance, restricting further what invested funds can achieve, with regards to day-to-day fund management, without incurring tax charges.

Income Tax

Income Tax Thresholds have been frozen resulting in any wage increases suffering tax at a higher marginal rate.  The Personal Allowance, the amount which taxpayers can earn free from tax, has likewise received no increase for 2023/24.  In fact, the last time the Personal Allowance was increased was for the 2021/22 fiscal year where it was increased by only £70.

The Scottish Government, with their power to set income tax rates at Holyrood, have decided to go one step further: the thresholds remain unchanged but an additional 1% is added to the Higher and Top rates of income tax (moving to 42% and 47% respectively).

There is one piece of good news and that is that the threshold at which tax returns from PAYE only earnings (i.e. a job or a pension) must be prepared has been increased to £150,000 from £100,000.  This takes effect from the 2023/24 tax year onwards so if taxable income breaches this threshold in 2022/23 a return must still be completed by 31 January 2024. 

Should you require any guidance or assistance please contact the Private Client Team at Stronachs for further advice.