Why the chancellor’s “boiled frog” autumn statement could see you pay more tax

person holding a green frog

You recently read about the chancellor’s autumn statement, and what the announcements will mean for your finances.

In his speech, Jeremy Hunt announced that he was extending the freeze on a range of tax thresholds and allowances until 2028. The Inheritance Tax (IHT) nil-rate band and the pension Lifetime and Annual Allowances are two that will be frozen for a further two years than initially planned.

In response to these freezes, Genevieve Morris, the head of corporate tax at Blick Rothenberg, described it as a Budget that “boils the frog”.

She said: “The continued freezing of tax thresholds means most people won’t notice it directly as the temperature increases, and so won’t leap out of the water. They’ll simply discover years down the line that they boiled.”

Here’s why these freezes could mean you’ll pay more tax in the next few years.

More families likely to pay Inheritance Tax as receipts hit record highs

According to HMRC, IHT receipts for April 2022 to October 2022 are £4.1 billion, which is £0.5 billion higher than in the same period a year earlier.

In the autumn statement, Hunt announced that the IHT nil-rate band of £325,000, and residence nil-rate band of £175,000, would be frozen until 2028.

So, if you plan to leave your home to a child or grandchild, and the total value of your estate (including your home) exceeds £500,000, your loved ones could face a 40% IHT bill on your death.

Freezing the nil-rate bands is likely to mean that more and more families are dragged into paying the tax as asset values and house prices rise. This is particularly significant for families dealing with estates in the south-east and south-west where house prices are the highest in the country.

Creating an estate plan and taking steps to mitigate IHT is likely to become all the more important to ensure a tax-efficient transfer of wealth between generations.

Pension allowance freezes increases the prospect of additional tax charges

In the autumn statement, the chancellor also maintained a freeze on the amount you can contribute tax-efficiently to your pension each year, and over your lifetime.

  • The Annual Allowance will remain at £40,000, or 100% of your earnings if lower until 2028
  • The Lifetime Allowance (LTA) will remain at £1,073,100 until 2028.

Research published by Citywire suggests that freezing the LTA for pension contributions at its current level will cost individual savers nearly £65,000 in tax-free cash as inflation rises.

That’s compared to the amount of tax-free cash you could take if the LTA was uprated by inflation between now and 2028.

Tom Selby from the firm that undertook the research said: “The impact a seven-year LTA freeze could have on retirement savings incentives is huge, with the Lifetime Allowance set to be almost £260,000 lower by 2027/28 than it would otherwise have been.

“This, in turn, would massively reduce the maximum tax-free cash someone can generate, to the tune of nearly £65,000”.

You may think that accumulating a £1 million plus pension pot is unlikely to affect you, but over the course of your working life, and thanks to rising asset values, many more people are likely to be affected by this freeze.

Selby continued: “Consider a healthy 65-year-old with a £1,073,100 pension pot – exactly the level of the LTA today – who takes their 25% tax-free cash (£268,275) and uses the remaining 75% (£804,825) to deliver a retirement income.

“That could generate an inflation-protected drawdown income of around £35,000 a year for 30 years in retirement – a very decent standard of living but hardly a king’s ransom.”

If you exceed the LTA, any lump sum you then draw could be subject to a tax charge of up to 55%.

Tackling LTA issues can be complex, so it can pay to seek advice on how to maximise the tax efficiency of your retirement savings.

4 million workers could pay additional Income Tax

In addition to the pension and IHT threshold freezes, Jeremy Hunt also froze the Personal Allowance – the amount you can typically earn before you pay Income Tax – and the level at which the higher rate of Income Tax (40%) is payable.

As wages increase, this will also drag more people into paying higher-rate tax, and see people pay higher-rate tax on more of their earnings than they would if these thresholds were uprated with inflation.

Analysis published by the Telegraph suggests that the freeze, combined with soaring inflation, will drag 4.2 million workers into the 40% tax bracket.

When tax bands were first frozen in March 2021, the number of workers paying higher-rate tax was 4.1 million. If the higher-rate threshold remains at £50,270 until 2028, a total of 8.3 million will be paying the 40% rate.

In addition, Hunt reduced the threshold at which you start paying the additional rate (45%) of Income Tax from £150,000 to £125,140.

This will pull an additional 250,000 people into paying additional-rate tax. If you earn more than £150,000 a year, you’ll pay around £1,240 more Income Tax each year.

Get in touch

If you’d like to understand what this “boiled frog” statement means for your finances, or you’d like to ensure you’re maximising all the tax breaks open to you, please get in touch.

Email or call us on 01454 416653.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

This blog is for general information only and does not constitute advice. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change. The information is aimed at retail clients only.

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