Autumn Statement: A soft landing for higher earners?
Looming recession. Stagnant wages. Soaring prices. Higher unemployment. Falling property prices.
The backdrop of gloom today and more gloom tomorrow was unremitting as chancellor Jeremy Hunt on Thursday laid out a series of well-trailed measures on tax rises and tight controls on spending.
The Office for Budget Responsibility (OBR) released forecasts warning that real disposable incomes would drop by 7.1 per cent over the next two years, the biggest fall in living memory.
“Virtually all of us can expect to be worse off,” Paul Johnson, director of the Institute for Fiscal Studies think-tank, said in the wake of the Autumn Statement. “We are in for a long, hard, unpleasant journey.”
Readers at the very top end of the income scale, however, may regard the chancellor’s measures as less punishing than they might have been. His main revenue raiser came from “stealth taxes” — the effect of freezing allowances and thresholds, which pulls millions of taxpayers into higher tax bands as inflation leads to wage increases.
“Super higher earners were warned that those with the broadest shoulders would pay the most,” says Tim Stovold, tax partner at accountancy firm Moore Kingston Smith. “That hasn’t happened. It’s a reasonably soft landing for them.”
When it comes to the investment outlook, there may be brighter prospects in store for some unloved UK equities. As the country enters an era of painful fiscal retrenchment, FT Money assesses the impact of the chancellor’s measures for taxpayers, investors and retirement savers.
The investment outlook
Only eight weeks ago then-chancellor Kwasi Kwarteng sent markets into panic mode with tax cuts in his “mini” Budget. Investors looking for reassurance in Hunt’s statement this week could take heart from a relatively muted market reaction.
William Hobbs, chief investment officer at Barclays Wealth, said he was watching to see if investors in UK debt would put up with the chancellor delaying most of the fiscal tightening for several years.
“The grown-up tone and the mostly orthodox thinking . . . seem to have been well received,” Hobbs says.
As the relationship between markets and the government moves to a more stable footing following weeks of tumult, investors say there are some opportunities peeping through the gloomy economic outlook.
The business owner: ‘I don’t know why directors are being targeted’
One particular Autumn Statement measure, the cut in dividend taxation allowances from £2,000 to £1,000 next April, and to £500 from April 2024, left business owner Rachel Hayward deeply disappointed.
Coming after exclusion from government Covid support, she believes this suggests a policy stance towards directors. “I don’t know why we’re being targeted in such a way.”
Hayward’s company, Ask the Chameleon, helps client businesses submit procurement tenders and applications for business awards. Set up in 2015 in Burton upon Trent, Staffordshire, she estimates it has helped secure £38mn funding for clients.
Her annual turnover is £60,000-£70,000. To cover running costs and keep money in the business, Hayward, 50, takes an income of about £20,000 a year, comprising salary and £5,000-£7,000 in dividends.
The tax-free dividend allowance was, she notes, £5,000 until a cut in 2018. She will now seek advice on whether to take out more in dividends while the basic rate remains at 8.75 per cent.
She accepts the freezing of personal allowances — “We all have to contribute a little bit” — and welcomed the highest earners having to pay more tax through the lowering of the top-rate threshold. But she wishes the chancellor would crack down on tax evasion and avoidance.
“We have had a poor year, in particular [for] mid- and small-cap UK equities. But it’s hard to see at these valuations that stocks will sell down even further,” says Anna Macdonald, fund manager at Amati Global Investors. “We still see a lot of pressure and a lack of confidence in domestically exposed equities. But selectively they are looking like very good value now.”
Stuart Clark, portfolio manager at Quilter, says his strategies have been light on UK equities, a position he’s now prepared to re-evaluate. “With the stability we see now, that can make the UK look slightly more attractive than it was before. That was something we were waiting for,” he says.
Labour-intensive sectors will face pressure from the record increase Hunt announced to the national living wage, MacDonald says, but there will be some relief from business rates.
Clark zeroes in on the chancellor’s decision to include even renewable energy producers in windfall taxes. “The move on the lower carbon producers I think is very interesting for the British economy,” he says. The government is still on a green push, but “it’s moving away from the carrot more to the stick,” he adds.
Bonds could also present an opportunity after a dreadful year, particularly for UK gilts. Yields on UK 10-year debt have risen from around 1 per cent in January to 3 per cent today. Many investors might find that income stream tempting, but have been nervous about volatility in bond prices. Further turbulence now looks less likely.
“The repricing of government bonds is proving an attractive opportunity for us,” says Clark.
However, Hobbs says taking advantage of a more stable market to scoop up bargains in either UK stocks or bonds carries substantial risks.
A higher-than-expected inflation rate could mean interest rates stay higher for longer than markets expect, knocking bond prices. UK companies that earn their revenues domestically are vulnerable to the bleak economic outlook and further weakness in sterling.
Hobbs flagged the fall in real disposable income projected by the OBR. “If that really happens, you’re going to want to be quite wary. That is a monster fall,” he says. “It’s just [a question of] waiting until the markets are on top of the bad news to a greater extent.”
Squeezing the middle
The main policy to “make those who have more, pay more” was a cut in the threshold at which the 45p income tax rate becomes payable from £150,000 to £125,140. This represents a flat tax increase of £1,243 for everyone earning over £150,000.
In fact, after the reversal of an increase to national insurance this year, anyone earning over £180,000 will take home more in the next tax year than they will in the current one, while those earning £160,000 will take home less, according to Nimesh Shah, chief executive of tax adviser Blick Rothenberg. “The ‘squeezed middle’ were squeezed again by Jeremy Hunt,” he says.
Those being dragged into the higher rate tax band for the first time will see the highest rate increases. Analysis by broker AJ Bell calculated that those currently earning £50,000 would over pay £6,288 more in tax owing to frozen thresholds between now and 2028 than they would have done had the tax allowances risen in line with inflation — a 14 per cent increase.
Speculation that Hunt would raise capital gains tax (CGT) rates did not come to pass but cuts to the capital gains and dividend annual allowances came as a blow to business owners and entrepreneurs, as well as investors who rely on dividends outside tax wrappers and pensioners selling down assets.
The private sector worker: ‘The basic rate tax threshold should have risen’
Sean Harris, a 32-year-old software engineer employed by a media and finance consultancy, has been deterred by the uncertain economic backdrop from leaving his two-bedroomed Liverpool terraced house and buying a much more expensive home in the Wirral.
The Autumn Statement barely shifted the dial. “It was steadily gloomy rather than unpredictably gloomy.”
Harris, who has fiscally Conservative views, was “broadly OK” with the chancellor freezing tax thresholds given the gap in the public finances, though it means paying more tax on his salary, which is nearing £90,000 a year. But he thought the threshold for basic rate taxpayers should have risen.
Conversely, deeming inherited wealth “not exactly meritocratic” he did not mind inheritance tax affecting more people. Brought up by a thrifty single parent, Harris is financially cautious. He pays most of his income above £50,000 into his pension, attracting 40 per cent tax relief. His current fixed rate mortgage deal at 2.4 per cent, or £314 a month, has 18 months to run.
The promise to maintain the state pension triple lock — politically “untouchable”, he fears — made him sigh. “It would be more Conservative to means-test that.”
The CGT annual allowance will fall from £12,300 to £6,000 from next April, halving again to just £3,000 from April 2024. Higher rate taxpayers with a capital gains bill will pay an extra £1,860 on shares and £2,604 on taxable property in 2024 — no matter how big the gain.
The dividend annual allowance falls from £2,000 to £1,000 next year, then to £500 from April 2024, translating in two years’ time to an extra tax burden of £590 per year for additional rate taxpayers earning over £2,000 in dividends.
“This move will mean some company directors reassess whether there is a tax benefit to running their own business, which doesn’t exactly play into the government’s hands of boosting GDP and creating more homegrown businesses,” says Laura Suter, head of personal finance at broker AJ Bell.
Middle-earning small business owners and the self-employed felt particularly stung by the chancellor’s cut to the dividend allowance. Andy Chamberlain, director of policy at the Association of Independent Professionals and the Self-Employed, said: “We’ve already seen the number of self-employed fall dramatically since the pandemic. The government seems intent on reducing that number further.”
The freeze to the inheritance tax “nil-rate band” — which has not budged since 2009 — will also be extended from the 2025-26 tax year to 2027-28 — a move the Treasury estimates could raise half a billion pounds. IHT receipts have doubled in a decade, and are forecast to reach £6.7bn this tax year.
Alex Davies, chief executive of brokerage Wealth Club says the announcement is “another kick in the teeth for those wanting to pass down their wealth to loved ones”. It estimates the freeze and inflation will leave IHT payers facing an average bill of £297,800 in 2025-26 and to £336,600 in 2027-28.
Retirement savers
For pensioners, Hunt reinforced the Conservative commitment to the “triple lock” by confirming that the state and new pension will rise by 10.1 per cent next April — a record inflation uplift to these benefits. The full new state pension, introduced in 2016, will increase to more than £10,000 a year.
But finance experts say millions of pensioners will be dragged into the tax net because of another measure in the statement: the freeze in the threshold at which income tax starts to be paid at £12,570 until at least April 2028.
“There is a sting in the tail as there is potential for the state pension to exceed the frozen personal income tax threshold by 2028, potentially dragging many millions more pensioners into paying income tax,” says Andrew Tully, technical director with Canada Life, a pension provider.
The public sector worker: Energy windfall tax ‘was the right thing to do’
John Rawling, 56, is human resources director for a public sector organisation. A member of the Local Government Pension Scheme, his current pension contribution from his salary of over £60,000 a year is 8.5 per cent.
As a 40 per cent taxpayer, he had been braced for changes to the tax relief on his pension payments. He was relieved a cut did not happen, both for his own sake and to continue encouraging other people to make provision for their old age.
But he adds: “It’s very clear I’m going to be paying a lot more income tax and a lot of national insurance each year over the next five years as a result of freezing allowance thresholds.”
He hopes to maintain his pension payments. “I’m building up a decent pension for my retirement.”
But his ability to save in other ways may be affected. Rising council tax and energy bills, the two biggest household costs at the detached Newcastle house where Rawling lives with his husband, are also a concern.
Increased taxes on energy companies were, he thought, “the right thing to do”. But he worries that the forecast drop in real household disposable income will hit small businesses such as restaurants, affecting neighbourhoods and costing jobs.
Stovold of Moore Kingston Smith describes the CGT and dividend allowance reductions as “most concerning” for pensioners on low incomes who rely on dividend payments and capital gains for income. “The government should possibly consider age-enhanced allowances for pensioners who are vulnerable,” he says.
State pension income is taxable but usually paid without any tax being deducted. The amount of income tax a pensioner pays depends on total annual income from all sources, which could include state pension, personal pension, interest and any rental income.
In spite of the relief offered to those on the state pension, there were concerns that future retirees would have to wait longer to receive it, as the welfare bill mounts.
The current state pension age is 66 but it is scheduled to rise gradually to 67 between 2026 and 2028. On Thursday the government said it intended to publish the outcome of a review of the state pension age in early 2023. This could bring forward the timetable for increasing the state pension age to 68 — and potentially beyond.
Reporting by Mary McDougall, Joshua Oliver, James Pickford, Josephine Cumbo and Chris Tighe