Business

The Autumn Statement and fiscal drag

Chancellor Jeremy Hunt delivered his Autumn Statement on November 17
Malachy McLernon

QUESTION As a business owner I was very happy when the Chancellor in his Autumn Statement did not make changes to the rates of tax but I have since read that I will pay more tax because the tax thresholds will remain unchanged for a number of years. Can you explain why I will pay more tax as a result of the thresholds not changing?

ANSWER: In his Autumn Statement, Chancellor Jeremy Hunt did not make changes to the rates of income tax, national insurance, inheritance tax or capital gains tax (CGT), but what he did do is freeze the threshold on each one of these except CGT, meaning the rates everyone is paying today will be the same rates that will apply after April next year. Whilst these rates remain the same, the Chancellor is relying on a concept known as ‘fiscal drag' to raise the level of tax taken from all these taxes.

The concept of fiscal drag means that as wages increase taxpayers are dragged into a new higher tax band. It is this impact that then generates increases in the tax revenue for the government. This allows the government to state that they have not increased the rates of tax, which was their manifesto pledge, whilst increasing the tax take and plugging an element of the ‘black hole' left after the mini budget.

For well-paid individuals there is a reduction in the threshold over which tax at 45 per cent is paid from £150,000 to £125,140, increasing the amount of tax payable by £1,200 per year.

Most of the current personal tax thresholds for income tax, national insurance, and inheritance tax are locked in until April 2028 and this “big freeze” will bring more taxpayers into higher rates of tax over the next five or six years as wage inflation kicks in.

There are reductions in the CGT Tax Annual Exempt amount from the current £12,300 to £6,000 from April 2023 and to £3,000 from April 2024 whereas for the Dividend Allowance the reduction is from £2,000 currently to £1,000 from April 2023 and to £500 from April 2024. These changes will also bring taxpayers into the tax paying regime earlier.

With the increasing popularity of electric vehicles, the Government will introduce Vehicle Excise Duty on electric cars, vans and motorcycles from April 2025. There will also be increases in the benefit in kind charge for such cars each year from April 2025/26 to 2027/28.

For businesses the threshold for secondary national insurance contributions will be held at £9,100 until April 2028, and the Employment Allowance is being maintained. Also being maintained at its current level is the VAT registration threshold, in this case for two years from April 2024.

On a more positive note, the Stamp Duty Land Tax cuts introduced on September 23 2022 as part of the Growth Plan will be retained until March 31 2025.

Like some of the other tax thresholds, the inheritance tax freeze will remain in place until 2028 as part of what Chancellor Jeremy Hunt has called a range of “difficult decisions” around tax needed to stabilise Britain's troubled economy.

The standard IHT rate is 40 per cent, with the decision on the freeze an expected one that comes against the backdrop of one of the most turbulent economic years in British history. Speaking after the Autumn Statement, the Chancellor said "Even after that, we still have the most generous set of tax allowances of any G7 country."

The extension of the freezing of the allowances means it is likely that more estates will become liable to inheritance tax, thanks to rising house prices and soaring inflation. Many people may find they are caught by surprise at the impact on their estate at an already painful time following the passing of a loved one.

However, there are also many other measures that people can take to ensure they leave as much wealth as they can to their family instead of the tax man and advice and planning should be taken early to plan for passing wealth to the next generation.

:: Malachy McLernon (m.mclernon@fpmaab.com) is partner, at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.