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Taking to the despatch box for his Spring Budget on 6 March, the Chancellor Jeremy Hunt continued to emphasise the UK economy as having “turned a corner”, with inflation expected to fall below the 2% target within a few months and the Office for Budget Responsibility releasing more optimistic UK GDP forecasts of 0.8% this year, 1.9% in 2025 and 2.2% in 2026.
Yet while it was keenly positioned by the government as a plan to cut taxes for the British public, the Spring Budget was in fact a tale of two halves: tax cuts in some areas but tax rises in others.
In the tax-cutting corner, the spotlight was once again positioned on National Insurance. Following the reductions to NI announced in the Autumn Statement, a further 2p cut will take effect from April 2024, reducing NI to 8% for employees and 6% for self-employed workers.
In the lead up to the Budget the government was reported to be wrestling between cutting NI or income tax rates, after Rishi Sunak pledged in the Spring Statement of 2022 that the basic rate of income tax would be cut from 20% to 19% by 2024. Lower-than-expected headroom in the government finances, however, means the Prime Minister is now unlikely to meet this pledge.
In fact, the Chancellor doubled down even further on his focus on reducing NI by announcing his intention to keep cutting the tax until it no longer exists. “Because we believe that the double taxation of work is unfair, our long-term ambition is to end this unfairness," he said, though no details on timings were provided beyond a vague commitment to do it "when it is responsible".
This is welcome news for workers who up to last year were subject to an ever-growing tax agenda since the Covid pandemic. When combined with the NI cuts in the Autumn Statement, employees will on average pay £900 less per year while self-employed workers pay £650 less.
It will, however, come as disappointing news to pensioners. NI is not paid on pension income so pensioners do not benefit from the government’s long-term plans to keep reducing it. Yet they are very much affected by income tax thresholds which remain frozen until 2028, a fiscal drag that will ensure the overall tax burden will continue to rise in the next few years despite the cuts to NI. Pensioners’ exemption from NI means they’re among the biggest losers of this fiscal drag.
In an unexpected move, the Chancellor also announced in his Spring Budget that the higher rate of capital gains tax (CGT) on property will reduce from 28% to 24% from this April, a tax cut which will in fact increase the overall amount of CGT that is paid in the UK, Hunt said. The basic rate of CGT for residential property gains will remain at 18% and it is also worth remembering that the CGT annual exempt allowance will still reduce to £3,000 from £6,000 on 6 April 2024.
“The reduction in the highest rate of capital gains tax levied on residential property sales will provide limited benefit as the majority of people selling a residential property will be selling their home, which already qualifies for 100% relief from capital gains tax,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd.
“The cut will help people selling second properties, but meanwhile people holding shares and funds that generate dividends could now find themselves in receipt of taxable dividend income which needs to be reported to HMRC and the tax paid. This is because the reduction to the dividend allowance to £500, announced in last year’s Budget, comes into effect on 6 April, adding not only a tax cost but an administrative burden for an estimated 4,405,000 people.”
The point at which companies have to register for VAT will increase from £85,000 to £90,000. Following a seven-year freeze to the threshold, many businesses expected a bigger increase.
To help fund the tax cuts, as well as other costly measures such as a £2.5 billion day-to-day funding boost and £3.4 billion in capital investment for the NHS, a series of targeted tax raids were announced. These include a new levy on vaping, one-off increases in tobacco duty and air passenger duty on business class flights, and abolishing multiple dwellings relief on property transactions, effective from June 2024, and the furnished holiday let tax regime from April 2025.
From April 2025, the controversial ‘non-dom’ tax status, which spares UK residents who are ‘domiciled’ outside the UK from paying UK tax on foreign income and gains, will be replaced with a system whereby new arrivals to the UK pay the same tax as everyone else after four years. A transitional arrangement will be put in place for current non-doms residing in the UK.
The government has also announced its intention to move to a residence-based regime for inheritance tax. Currently non-doms are not liable to pay IHT on non-UK assets until they've been a UK resident for 15 out of the past 20 tax years. The government's consultations will include a 10-year exemption period for new arrivals and a 10-year ‘tail-provision’ for those who leave the UK and become non-resident. No changes to IHT will take effect before April 2025.
Speaking of IHT, rumours of its demise again failed to come to fruition in the latest Budget. Widely viewed as the most disliked UK tax, rising property values and frozen allowances have meant IHT no longer only affects the most wealthy after the death of a loved one. It remains to be seen if the government revisits IHT policy in another fiscal event before the General Election.
In a boost for parents, the threshold to start paying back child benefit will increase by £10,000 to £60,000 from April, and child benefit will no longer need to be repaid in full until earnings exceed £80,000. The government also said it will consult on moving to a household system of means testing child benefit from April 2026. Speak to your financial adviser if you have been utilising pension contributions or other salary sacrifice measures to keep your earnings below £50,000.
Beyond the tax interventions, the government also used the Spring Budget to launch changes to the pensions, savings and investments landscape, with a particular focus on investing in the UK.
A new 'British ISA' will provide an additional £5,000 tax-free allowances, on top of the existing £20,000 annual ISA allowance, for people to invest exclusively in UK companies. When and how it will be implemented will be decided following a government consultation, although the earliest likely launch date is thought to be April 2025. It remains to be seen how popular this will be, especially for investors who value diversification in their portfolio.
“This is the first increase to ISA allowances in seven tax years, however it does not quite keep pace with inflation,” says Phillpott. “Had the £20,000 allowance introduced in the 2017/18 tax year been increased in line with inflation, the tax-free amount that would be available would have risen to around £25,450 based on the Consumer Price Index figures over these years.”
The Chancellor said by 2027 local authorities and defined contribution (DC) pension funds will be forced to disclose how much they have invested in UK shares compared with overseas businesses. Funds will also be required to publicly compare their performance data and poor performers will not be allowed to take on new business from employers, the government said.
Finally, the Spring Budget revealed that state-owned savings bank NS&I (National Savings & Investments) will launch a new 'British Savings Bond' offering a guaranteed rate for three years for investments between £500 and £1 million. NS&I bonds are gold plated as they are 100% backed by the Treasury, meaning your savings are protected beyond the £85,000 secured by the FSCS when saving with another regulated bank. However the ultimate appeal of the new British Savings Bond will depend on the interest rate attached to it, which is yet to be revealed.
Speak to your financial adviser about how any of the announcements in the Spring Budget will impact you, and how to build the right plan to meet your retirement goals. Alternatively, you can also request a call back.
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Important Information
This communication is based on our understanding of current UK tax legislation and HM Revenue and Customs (“HMRC”).
Tax rules can change and their impact on you will depend on your circumstances.
The FCA does not regulate inheritance tax planning
This communication is for information purposes only. Nothing in this communication constitutes financial, professional or investment advice or a personal recommendation. This communication should not be construed as a solicitation or an offer to buy or sell any securities or related financial instruments in any jurisdiction. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Ascot Lloyd as a result of using different assumptions and criteria.
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