Autumn Statement 2022

The chancellor of the exchequer, Jeremy Hunt, today gave his Autumn Statement. Addressing the £55bn hole in public finances, the Autumn Statement was, as expected, a full-blown budget delivering a double feature of record-breaking tax rises and austerity 2.0. 

A key theme throughout all areas was tax threshold freezes and, in some cases reductions.

Mr Hunt’s key tax announcements are summarised below with more detailed analysis to follow tomorrow.

Discover our initial response:

Personal taxes

Income tax rates and bands

With income tax and National Insurance Contributions (NICs) accounting for over half of the Treasury’s annual revenues, it was inevitable that the focus of Mr Hunt’s measures centred on increases to the taxes paid by individuals. Rather than increase the headline rates of tax, Mr Hunt has opted to freeze and reduce the thresholds at which income tax is paid. This has the effect of dragging more people into the tax net as incomes rise in the current inflationary environment, as well as increasing the number falling within the highest income tax rate, given the reduction in that threshold. The measures announced will, in particular, have a significant impact on single income households, as more will be dragged into higher tax bands and could be hit by extra charges like the High Income Child Benefit Charge. It will also impact on those who do not take professional advice and are inadvertently caught out by them, such as some pensioners who may now be subject to tax on their income and gains on their investments held outside of ISAs. To summarise:

  • income tax and NICs thresholds will be maintained at their current level until April 2028;
  • the income tax personal allowance will be frozen at £12,570 until April 2028;
  • from 6 April 2023, the threshold above which the highest income tax rate of 45% is paid by individuals will be reduced to £125,140 (currently £150,000); and
  • dividend income allowance will be cut to £1,000 from April 2023, then £500 from April 2024.

Capital gains tax rates and allowances

  • As speculated in the lead up to today’s Statement, the capital gains tax annual exemption has been reduced. The well-trailed cut to £6,000 from £12,300 will come in from 6 April 2023. However, more surprisingly, there’s a further cut to £3,000 from 6 April 2024.

Inheritance tax

  • The inheritance tax nil-rate band and residence nil-rate band will be maintained at current levels until April 2028.
 

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Business taxes

Corporation tax

  • The energy profits levy for profits generated by oil and gas exploration and production companies, the ’windfall tax‘, has been extended to operate until the end of March 2028, and increased from 25% to 35% from 1 January 2023. 
  • A new electricity generator levy was also announced. This is a temporary 45% levy on extraordinary profits of low carbon electricity generators, which will apply between 1 January 2023 and 31 March 2028.
  • Citing widespread reports of abuse of the research and development (R&D) tax reliefs regime, the government is cutting the enhanced deduction for small and medium sized businesses (SMEs) from 130% to 86%, and the rate of payable credit available to loss-making SMEs will reduce from 14.5% to 10%. However, for large companies the rate of R&D expenditure credit (RDEC) has been increased from 13% to 20%.
  • As previously announced, the government will legislate to implement the internationally agreed OECD pillar two framework – the ’global minimum tax’ – in the UK for periods beginning on or after 31 December 2023.
  • Continuing the global focus, the rate of diverted profits tax will increase from 25% to 31% from April 2023.
     

VAT and indirect tax

  • The VAT registration threshold will remain at the current level of £85,000 until March 2026. This threshold was first frozen at this level in 2017 to allow the government to consider recommendations on where it might best be set long term. However, for the last five years, the government has simply allowed the threshold to gradually shrink in real terms, quietly dragging more small businesses into the VAT net. The current high rates of inflation will only accelerate this trend.

Employment taxes

  • From 1 April 2023, the National Living Wage (NLW) will increase by 9.7% to £10.42 per hour. 
  • National Minimum Wage (NMW) rates for young people and apprentices will also be increased by up to 10.9%. 
  • The threshold at which employers start to pay Class 1 employers NICs at 13.8% will be fixed at £9,100 from April 2023 until April 2028. 
  • Company car benefit charges for electric and ultra-low emission cars emitting less than 75g of CO2 per kilometre will increase by 1% of list price in 2025-26; a further 1% in 2026-27 and a further 1% in 2027-28, up to a maximum of 5% for electric cars and 21% for ultra-low emission cars. Benefit charges for all other company cars will be increased by 1% of list price for 2025-26, up to a maximum of 37% and will then be fixed in 2026-27 and 2027-28.
  • The van benefit charge, and car and van fuel benefit charges, will increase in line with CPI from 6 April 2023.
     
 

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Other taxes and related announcements

  • The stamp duty land tax cuts announced on 23 September 2022 will now be a temporary reduction, remaining in place only until 31 March 2025.
  • From April 2025 electric vehicles will no longer be exempt from Vehicle Excise Duty (VED).

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The economist view

Today’s Autumn Statement came in largely as expected with total tax rises and spending cuts of around £55bn, roughly split between tax rises and spending cuts. Financial markets have taken the news in their stride with 10-year gilt yields and the pound barely moving, despite the chancellor’s new fiscal rules being significantly looser than previously. However, the Office for Budget Responsibility’s (OBR) forecast paints a dire picture of the economic outlook over the next two years with a year-long recession and a record-breaking fall in households' real incomes.

Dire economic outlook

Focusing tax rises on the wealthy, who amassed the most savings during the pandemic and have the lowest propensity to spend, and windfall taxes on excess profits by energy companies, will limit the hit to spending in the rest of the economy. What’s more, by uprating benefits in line with inflation, raising the National Living Wage by 9.7% and announcing further direct support to vulnerable households, the chancellor is supporting the incomes of those with the highest propensity to spend.

However, much of that will be offset by increases in energy prices. From April 2023, the typical household’s annual energy bill will rise to £3,000, from £2,500 at present, and grants to low-income households will be worth only £900, down from £1,300 at present.

As a result, real household disposable income (RHDI) per person is set to fall more than 7% over the next two years. This is by far the biggest fall on record and would return real incomes back down to their 2013 levels.

This is the key reason why the OBR expects the economy to be in recession from Q3 2022 to Q3 2023, with a 2.1% fall in GDP, roughly in line with our own initial predictions.

The chancellor wisely avoided making the sums add up by slashing investment spending, which will remain on its current path over the next two years. Most of the spending cuts have been delayed until 2025, after the next general election, so may ultimately not occur.

Outlook for interest rates unchanged

Today’s announcements probably won’t make much of a difference to the outlook for interest rates. Protecting spending on investment will ensure that the supply side of the economy doesn’t take another unnecessary hit, while the big hit to real incomes over the next year will, despite the extra support for vulnerable households, ensure that demand doesn’t increase by more than the Bank of England expects. We still expect a base rate rise of 0.5% in December 2022 and for it to peak at about 4.5% early next year. 

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Gary Heynes Gary Heynes

Partner, Head of Private Client

James Morris James Morris

Partner, Head of Corporate Tax

Susan Ball Susan Ball

Partner

Ian Carpenter Ian Carpenter

Partner, Head of Indirect Tax