Finance Minister to Louis XIV, Jean-Baptiste Colbert, once famously declared “the art of taxation consists in so plucking the goose, as to obtain the largest possible amount of feathers, with the smallest possible amount of hissing.”
This delicate art has been one that Chancellors have been grappling with for centuries. What will generate the most amount of tax revenue possible, with minimal political fallout amongst the electorate?
Usually on budget day there’s lots of jiggery pokery (not a word I often get to weave into a bulletin) and the pulling of rabbits out of hats. Chancellors regularly appear to achieve the impossible – ta dah! Raising more tax revenue, with little more than a nip here, a tuck there and some obligatory criticism from the opposition.
More moolah. Minimal feathers ruffled. Goose pacified. Job's a good'un. Off to Julia’s Tea Room for some foie gras to celebrate…
No such luck this time for Jeremy Hunt. Backed into a fiscal corner by the ruinous state of the public purse and the disastrous (and short-lived) tax policies of Kwasi Kwarteng, on Thursday last week he had no option but to hit the goose square between the eyes. Which he promptly did. With both barrels. And now feathers are flying everywhere.
In the darkest days of the pandemic, when lockdowns were looming large and toilet paper was in short supply, the government announced a financial support package the likes of which had never been seen before. Undoubtedly these measures saved millions of individuals and small companies from financial ruin. They also came with an eye watering cost to the public purse that was always going to have to be repaid at some point.
Unfortunately, it seems the day of reckoning has now arrived. As Jeremy put it with typical political eloquence, the government are ‘asking more from those who have more’. Apparently, it is now down to the geese with the broadest backs (longest necks??) to take one for the gander and help the government rebalance it’s books.
Right, that’s enough goose puns for one day. Consider yourselves lucky I took the high road – I was considering going with ‘business owners and higher earners get plucked’…
So, what might this mean for your income and your investments?
Well, for investors looking to dispose of buy-to-let property, or portfolios with returns subject to capital gains tax, the simple truth is you’ll be paying more tax on your gains. This isn’t because the rate of CGT is increasing, but because the capital gains tax allowance is being cut. The annual tax-free allowance for capital gains will be reduced from £12,300 to £6,000 from April 2023 and £3,000 from April 2024.
Those in receipt of dividends - be they in the form of investments or business profits – will also feel the sting. The dividend tax allowance will be halved from next year, falling from £2,000 to £1,000 next year, then to £500 from 2024.
Those with higher earnings meanwhile - be they in the form of dividends or salary - will also be impacted. The additional rate of income tax – 45% on earnings and 39.35% on dividends – will now apply to all income beyond £125,000 per annum.
Other important thresholds remain frozen, or have been frozen for longer than previously expected. The basic and higher rate tax bands are now locked in place until 2028, whilst the personal allowance tax trap continues to roost on earnings between £100,000 and £125,000. The inheritance tax nil rate band is to remain set at £325,000 per person until 2028, meaning more estates are likely to begin creeping into IHT. The lifetime allowance on pensions meanwhile remains set at £1,073,100 until 2026.
One of the only real positives to come out of the budget, was that the ‘triple lock’ on state pensions has been maintained. Introduced by David Cameron’s government in 2010, the triple lock increases state pensions each year in line with the highest of three possible figures: inflation, average earnings, or 2.5%. From April 2023 state pensions will be uplifted in line with CPI. This increase of 10.1%, is the highest ever on record and will boost the income of the 12.5m pensioners in the UK, helping to protect those on low income in retirement from the impact of inflation.
But there have to be some other upsides, right?
Well, I think there may be some ‘kitchen sinking’ going on here. In business and finance, this describes when a company listed on a stock exchange has bad news to report to investors and the market. Rather than trickling portents of doom out gradually over time, which is likely to put downwards pressure on their share price for a prolonged period, they effectively throw every last scrap of bad news out at once, into the harsh glare of the media and the markets. Everything bar the kitchen sink that is (boom boom). Theoretically, with all the bad news hitting at once, their share price is inevitably going to take a tumble, but hopefully from there the only way is up.
Proof that – if ever it were needed - in finance we really can come up with silly technical terms for pretty much anything.
Such thinking could also be applied to the Chancellor’s statement. Regardless of your political leanings, I think it’s fair to say that the Conservative government haven’t showered themselves in glory over the last twelve months and their chances of re-election aren’t looking too good right now.
Just look at the latest voter intention poll from YouGov.
With the next general election unlikely to take place prior to December 2024, it feels like Rishi and Jeremy may have just done some kitchen sinking of their own. If they’re going to hit the public with a wave of tax hikes and unpopular legislation, they may as well to do it now. It’s not like their popularity can get much worse right? They may see this as an opportunity to win back voters in the intervening period before the next general election. It is no coincidence that some of the most generous budgets have an uncanny habit of being delivered shortly before polling season. With so much bad fiscal news out in the open now, perhaps we can hope for a little fiscal cheer a bit further down the road.
Furthermore, if the tax cuts announced last week do start to repair the public finances before the next election and get us on the road to recovery, you can bet the government will be broadcasting it from the rooftops in the run up to polling day.
It's also worth noting that some stalwart safe havens remain available and unbesmirched.
You can pay up to £20,000 a year per person into an ISA and benefit from tax-free growth and tax-free withdrawals.
Pensions just became even more attractive. If you have profit left over in your business, or are receiving a lump sum bonus via PAYE, consider paying it into your pension. If made as an employer contribution, or via bonus sacrifice, the money gets credited to your pension before any deduction of tax or NI. For businesses, it’s also corporation tax offsetable too. Once invested within your pension it can grow tax free and 25% of it can be withdrawn tax free in the future, whilst money held in a pension sits outside of your estate too. Even if you may potentially exceed your lifetime allowance, it may still be worthwhile suffering tax on the overage, given the other tax advantages of pensions.
Finally, VCTs offer 30% income tax relief on whatever you invest up to £200,000 per year, paying tax-free dividends and with gains free from CGT provided they are held for five years. These are specialist investments and high risk, so only suitable for certain investors, but for some they remain an attractive proposition.
Of course, I must note, none of this is advice, as the benefits will depend on your personal circumstances. That’s why we meet regularly to review your financial plan and tailor our advice to your circumstances and goals. The new tax rates will be factored into the financial models we build and maintain for you, so we’ll ensure that you remain on track to achieve those important milestones, regardless of changing tax policy.
So, whilst it was a bit of a disheartening budget for those in business and middle to higher income, try not to feel too glum. It’s unrealistic to expect things to remain the same in a financial landscape in a constant state of flux. Sometimes things change and you end up paying more tax. Sometimes the reverse is true, and at least some tax efficient tools remain available to us.
Carry on enjoying life in the here-and-now, whilst planning for your financial future and striving towards the things that are important to you.
You know what they say about death and taxes, but no-one ever died from taxation. Well, not recently anyway. They did in 1380, but that was a long time ago...
Hopefully you will have already received our budget summary guide which was sent out on Friday. If you’d like to discuss anything contained within this bulletin, or the budget, please just let me know.
