There is no way to sugarcoat this.
The UK is in a recession, and taxes are going up, as we were promised.
Here are the updates Jeremy Hunt announced in the Autumn Statement 2022.
- A freeze on income tax thresholds
- Allowances frozen until 2028: Personal allowance (£12,500), NI, Inheritance tax, Pension allowances
- Capital gains tax allowance from £12,300, down to £6,000 from April 2023, and then halved again in April 2024.
- Dividend tax-free allowance drops from £2,000 to £1,000 in April 2023, and £500 in April 2024
- Lower threshold for additional rate taxpayers (45% tax) from £150,000 to £125,140. That’s £1,243 more tax per year
- The state pension, benefits and tax credits will rise in line with inflation – 10.1%
- The government’s energy price guarantee will be kept for a further 12 months at an average of £3,000 for a typical household, up from £2,500 at present.
- National Living Wage will increase from £9.50 an hour for over-23s to £10.42 from April
- Increased schools budget, with an extra £2.3bn a year and NHS by £3.3bn
- Energy firms will pay an expanded windfall tax of 35%, up from the 25% already levied on their profits
- R&D relief for SMEs cut to 86%, and the credit rate to 10%
- And electric vehicles will no longer be exempt from vehicle excise duty from April 2025
Even though Hunt didn’t rise the income tax, he did this in stealth mode by freezing the tax thresholds.
This means millions will pay more tax as wages rise to keep up with inflation.
In a 10% inflation environment, this will be the biggest blow to the average person.
Hunt also said the UK is in a recession. These measures will make it shallower and quicker. The Office of Budget Responsibility said that despite the new support with energy bills, living standards are going to fall by 7% over the next two years.
Inflation is expected to be 9.1% on average in 2022. It will go down to 7.x% in 2023.
On 23 September 2022, the government announced that the threshold for paying stamp duty would be raised from £125,000 to £250,000. For first-time buyers, this will increase from £300,000 to £425,000. It means that first-time buyers do not have to pay stamp duty if their home costs less than £425,000.
Stamp duty cuts will remain in place until 2025.
Dividend tax allowances are going down:
|Dividend tax allowance 2022-23||Dividend tax allowance 2023-24||Dividend tax allowance 2024-25|
If you are a business owner, that’s 1,000 less tax-free next year.
If your dividends come from companies in an ISA or pension, then your dividends are tax-free anyway. But for most business owners and self-employed, this is another blow.
The dividend rates will remain the same. I am not sure if the 39.75% will kick in at 125k or at 150k as before.
|Dividend tax up to £50,270 income||Dividend tax higher rate||Dividend tax additional rate|
Even though the dividend tax allowance will drop by £1,000, the rates are not going up. Speculation had it that dividends or capital gains tax rates would match income tax, but no. Not yet, at least!
Worth mentioning dividend tax is paid AFTER businesses have paid corporation tax on it.
Businesses will first pay 25% corp tax before the owner pays dividend tax. Increasing dividend taxes would disincentivise entrepreneurship even more, in my view.
There was no mention of corporation tax during Hunt’s speech.
This is because it will go ahead as planned.
From April 2023, corporation tax will increase to 25%.
See this article to understand how corporation tax will work in 2023, with examples and a free calculator.
Businesses with profits less than £250,000 will pay lower corporation tax.
2.5 As previously confirmed, the planned increase in the Corporation Tax rate to 25% for companies with over £250,000 in profits will go head. This will still be the lowest rate in the G7 ensuring the UK remains strongly competitive internationally. The Corporation Tax rise in April 2023 will only affect the most profitable companies because of the Small Profits Rate. The additional rate of income tax will now to be removed, and the basic rate of income tax will be maintained at 20%.Full Autumn Statement Gov UK report
If your business profits are £50,000 or lower you will keep paying 19% (Small Profits Rate).
Businesses with profits between £50,000 – £250,000 will pay corporation tax somewhere between 19 to 25%, as I have previously explained here.
Working out the tax gets a bit tricky, especially if you own more than one company.
As successful business owners usually say: Focus on increasing your profits, not on taxes!
Additional rate taxes
Those with income higher than £100,000 were already heavily taxed. Personal allowance (£12,500) is reduced for any extra pound they earned after 100k. When the income reaches £125k, the allowance is completely lost.
This means the effective tax on income between £100 – £125k is 60%.
After £125,000, the income tax rate used to be 40%, and then 45% after 150k.
From April 2023, the 45% will apply from £125,140.
So if you earn more than £100k (gross), you will pay 60% (£100 – £125k), then 45% on £125,000+.
I still don’t get the 60% band in the middle but
It was nice to see the national living wage increase by about 10% to £10.42 per hour.
This also comes after low earners had recently seen their National Insurance contributions zeroed up until the personal allowance threshold (£12,500). So that’s good.
If we are already in a recession, then the fact the labour market is still strong is a good sign.
I know it’s hard for everyone.
Things you can do to overcome the challenging situation:
- Try to stay employed / in business
- Become more valuable in your work – indispensable
- Increase your pension contributions (lowers your corp tax)
- Ask for a pay rise
- If you have a cash surplus, invest it to keep up with inflation
- Stay hopeful – 2024 is not (very) far, and the recovery will come
- Focus on the things you can control – spending, earning, side hustling, having fun, how you allocate your time
What have I missed? Keen to hear your thoughts on the Budget.
Stay positive! Thank you for reading.
Guest appearance on Rob’s podcast
I had a great time talking with Rob J, who runs the awesome Coffee & Coding podcast for freelancers and software engineers.
Here’s the link to the episode:
Building Wealth as a Software Developer (podcast episode)
In this episode, we discuss:
• Building wealth as a software developer
• Investment options for freelancers
• Putting your money to work for you
• How to get more out of your limited company
• and much more!