Autumn Statement: frozen tax thresholds deliver icy blast

While a stealth raid on taxes may seem more favourable to a tax hike, putting tax thresholds in the deep freeze will hit families hard and still inflict pain on taxpayers struggling to deal with a cost of living crisis.

Clare Moffat, pensions and legal expert at Royal London, said:

Income tax freeze 

"Leaving thresholds untouched for longer puts fiscal drag into overdrive. Pay increases to help employees cope with higher inflation drags more people into higher tax brackets, ultimately increasing the Government’s tax take. The personal allowance being frozen means those most affected by the cost of living crisis will suffer as the higher rate tax threshold begins to affect many families with modest incomes. Households already contending with higher mortgages, bills and rising food costs will have a further chunk of their income gobbled up by HMRC.

"If you find yourself paying a higher rate of tax than before, then more tax relief will potentially be available to you through your pension. For example, those who weren’t higher rate tax payers previously can pay a pension contribution which effectively acts as a tax reducer to bring themselves back into the basic rate band."

Tax hike for the highest earners 

"Lowering the threshold at which people start paying the 45p Income Tax rate to £125,140 from £150,000 drags more higher earners into the top tax bracket and costs £150k earners around £1,200 extra per year.

"The loss of the personal allowance starts from £100k (those earning between £100k and £125,140 pay tax effectively at 60% in England and Wales) and if 45% tax rate kicks in from £125,140, this will mean potentially many more workers paying this rate."

Capital gains tax (CGT)

"Changes to the headline rate, reliefs and allowances of CGT, including halving the tax-free allowance for capital gains, from £12,300 to £6,000 in April 2023 and to £3,000 in April 2024, again drags more people into paying it. The rate of CGT is 10% for a basic rate taxpayer and 20% for a higher rate taxpayer but this increases to 18% and 28% respectively if the asset being sold is a second home. As the cost of living crisis goes on, we might see those who bought second properties to rent out as an investment selling them and paying CGT on any gain in value."

Inheritance Tax 

"The extended freeze of the nil rate and the residence nil rate band has, and will continue to have, a significant impact with more and more families paying inheritance tax, raising £100’s of millions for the Government’s coffers.

"Already we’ve seen a 14% increase in IHT receipts between 2020/21 and 2021/22, the largest increase since before the introduction of the residence nil rate band. There are a variety of reasons for this including the increase in house prices, but with the ‘nil rate band’ frozen since 2009, more people will be dragged into paying the tax over time."

Dividends 

"A cut to the £2,000 tax-free dividend allowance will hit savers and small business owners who pay themselves in dividends rather than taking a salary.

"Business owners who take money out of the business by taking a small salary and large dividends will pay more tax. This reduction in the dividend allowance combined with an increase in corporation tax will mean less money for business owners. For those who live on dividend income this increase, as well as the freeze on the higher rate threshold, could mean more dividends being subject to higher rate dividend tax."