Autumn Statement: Looking beyond the headline rates to understand the complexity imposed on individual taxpayers

United KingdomScotland

Personal tax announcements

As part of his Autumn Statement, the UK Chancellor Jeremy Hunt announced various measures related to personal taxes, particularly income tax, which broadly result in an increased tax burden for individuals.

The measures announced today included:

  • lowering of the additional rate threshold from £150,000 to £125,140 from 6 April 2023;
  • freezing of tax thresholds within income tax, NICs and inheritance tax for an additional two years, until April 2028;
  • reduction of the dividend allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024; and
  • reduction of the capital gains tax annual exempt amount from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024.

Effective tax rate

The headline point here, highlighted by many news outlets, is that from next April the 45% rate of income tax will apply to earnings over £125,140.

This figure matches the point at which the personal allowance reduces to zero. The personal allowance of £12,570 is available to individuals earning income up to £100,000; for individuals earning more than this amount, the allowance reduces by £1 for every £2 earned above £100,000. What is not always appreciated is that, as a result of this gradual tapering of the personal allowance, an effective 60% rate of tax applies to income earned between £100,000 and £125,140 (the “taper rate”).

As a result of today’s announcement, individuals earning over £125,140 will not only lose their full personal allowance, but will also now fall within the additional rate of tax. As such, the effective rate of taxation for individuals earning over this threshold has increased.

For example, an individual earning £130,000 of employment income in the 2023/24 tax year, ignoring National Insurance, would now see an effective overall tax rate of 34.38% on the whole of their income.

Existing additional rate payers will pay £1,200 or so more in tax on the extra income between £125,140 and £150,000 now brought within the additional rate. For a taxpayer earning £150,000, this represents an increase of the effective tax rate by circa 1%.

Complexity imposed on individual taxpayers

No attempt was made in the Autumn Statement to answer difficult questions about the current design of the tax regime as it applies to individual taxpayers. Currently, the loss of the personal allowance for individuals earning above £100,000 is not only, arguably, contrary to the concept that such allowances should be a universal benefit, but also creates a compliance burden on both individuals and HM Revenue and Customs. The application of the taper rate is so complicated that it requires anyone earning above £100,000 to file an annual self-assessment tax return.

A bolder statement might have aimed at tackling these complexities, for example, by restoring the personal allowance to all taxpayers but lowering of the additional rate threshold further to £100,000.

Mitigating the impact

As was the case before today’s Autumn Statement, there continue to be ways to mitigate the loss of the personal allowance and the reduction of the additional rate threshold.

In particular, allowances arising from pension contributions have not been affected by today’s announcement. An annual allowance of £40,000 is available to all but the highest earners, which effectively reduces an individual’s taxable income. By making pension contributions up to the annual allowance threshold, individuals who would otherwise fall within the taper rate could take themselves partly or fully outside of this rate.

Equally, the annual ISA allowance (currently £20,000) continues to be available, which represents a tax efficient means of making savings and investments.