Freelancers and contractors will see their earnings squeezed not only by higher taxes but tax grabs on dividends following the Autumn Statement announcements.
Jeremy Hunt has delivered a budget that has included tens of billions of pounds worth of spending cuts and tax rises in order to plug the £55 billion black hole in the UK’s public finances. Many of the statement’s announcements were to bring down the government’s debt liabilities.
However, when all the tax hikes and decreased benefits are calculated, the average family in the UK will be £4900 worse off per year (BBC). That’s like losing a whole month’s salary or more. Any boost in pensions in line with inflation will be cancelled out once energy bills rise after April.
Of course, we need to raise tax to pay for vital public services, but time and again it seems our very smallest businesses are the first targets.Andy Chamberlain, Director of Policy at IPSE
In his Autumn Statement speech, Chancellor of the Exchequer Jeremy Hunt he said: “My decisions today do lead to a substantial tax increase,” he says. “[But] We have not raised headline rates of taxation, and tax as a percentage of GDP will increase by just 1% over the next five years.”
His announcements include:
- 45p rate rate reduced from £150,000 to £125,140
- The income tax personal allowance, higher rate threshold, main national insurance thresholds and inheritance tax thresholds are maintained at current levels for two years to April 2028.
- The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024
- The 20pc income tax will remain frozen at £12,570 until 2028, as will the point where the 40pc tax rate kicks in – at £50,270.
- Stamp duty cuts from the mini-budget will remain until 31st March 2025.
- The national living wage will change for over 23s from £9,50 an hour to £10.42 from April 2023
- The state pension, benefits and tax credits will rise by 10.1%, in line with inflation.
- £3.3bn NHS budget for 2023 and 2024
- £2.5bn annual budget for state schools for 2023
Andy Chamberlain, Director of Policy at IPSE (the Association of Independent Professionals and the Self-Employed), said the current government is disincentivising people to start their own businesses:
“After the financial damage of the pandemic, exclusion from support, the changes to IR35 taxation, the recent tax hike on dividends and the impending corporation tax hike, this latest attack is further salt in the wound for anyone working through their own company.”
“The government is making it harder and harder for those who work for themselves. Of course, we need to raise tax to pay for vital public services, but time and again it seems our very smallest businesses are the first targets.
“We’ve already seen the number of self-employed fall dramatically since the pandemic – the government seems intent on reducing that number further. By slashing the dividend allowance, the government has once again demonstrated that it does not support small business.”
Delayed financial support in areas like social care will especially make matters worse for some freelancers and their families. Investment specialists are already predicting that more people will consider moving their assets, including their pensions, outside the UK.
No muted ‘wealth tax’ was announced and although those earning £150K will be worse off by £1,250 a year due to the new 45% tax band, those earning £1m will also only be worse off by the same £1,250. How does that make sense?Colin Bates, a Financial Planner at Chapter3 Financial Planning
Why are millionaires paying so little?
Colin Bates, a Financial Planner at Chapter3 Financial Planning, believes the Autumn Statement was great news for pensioners with the triple lock staying in place. However, he says: “It’s more bad news for higher income earners with the 45% tax band now affecting anybody earning more than £125K.”
He reminds us that their marginal rate of tax from £100K to £125K is already at 60%. “It’s also bad news for small investors with dividend and capital allowances being slashed, making the case to invest in ISAs even stronger. We could also see BTL property investors look to accelerate selling any properties before their annual capital allowance is slashed 50% by April 2023 then by another 50% by April 2024.”
The biggest sigh of relief, he says will be with the very wealthiest in our nation. “No muted ‘wealth tax’ was announced and although those earning £150K will be worse off by £1,250 a year due to the new 45% tax band, those earning £1m will also only be worse off by the same £1,250. How does that make sense?”
Less power to the people
Many people were hoping for higher windfall taxes on energy firms that made billions of pounds in profit over the energy crisis so less was taken out of their wage packets. Energy firms will pay a windfall tax of 35%, up from the 25% already levied. That means another £14bn in the Treasury’s coffers.
Freelancers working from home will be expected to pay more for their energy bills as the government reduces support. The Autumn Statement revealed that from April typical bills will rise from £2,500 to £3,000.
Energy efficiency is a huge priority for the current Conservative government’s budget and has announced £6bn will be invested into energy efficiency in one way or the other. One way that freelancers can make the most of this investment is to see if there are any government incentives to help make their homes or offices more energy efficient. But also, looking at how they can provide their freelancer services and skills to the energy sector, namely renewables and energy tech.
- However, those contractors and side hustlers on means-tested benefits will see extra payments of £900 whereas pensioner households will get an extra £300 and those on disability benefits, £150.
Those considering purchasing an electric vehicle in the next year will be disappointed to learn that tax incentives will eventually vanish. EVs will no longer be exempt from vehicle excise duty from April 2025.
Homeownership is further from reach
- Jeremy Hunt announced that the stamp duty cut would be reversed in 2025.
- At that point, the nil rate threshold will be cut from £250,000 to £125,000.
- The nil rate threshold for first-time buyers will fall from £425,000 to £300,000.
- And the maximum purchase price to which first-time buyers’ relief can be applied will fall from £625,000 to £500,000.
Social care support delayed
- The Chancellor has announced the £86,000 cap on social care has been delayed for two years.
- It had been due to begin from November 2023.
- The cap covered social care- although families would continue to need to find money to cover so-called accommodation costs.
- There is concern the reform could be postponed indefinitely.
- The Chancellor announced the government would make available up to £4.7 billion in 2024-25 for adult social care but uncertainty remains on how this will work and what it means for families.
“News that the social care cap could be delayed will be greeted with horror by the many people currently wrestling with the huge costs of paying for care,” said Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown.
Morrissey said that families would still have had to find the money to pay their loved one’s accommodation costs but the £86,000 cap on social care would have given some relief.
A delay risks leaving people’s long-term planning in tatters and there will be huge concerns that this is a step towards this plan to deal with social care being put on the backburner, leaving families up and down the country continuing to struggle.
The uncertainty over future funding is concerning. “The Chancellor did announce more funding for the social care sector over the coming years but as yet we lack detail as to what that entails and for now struggling families have little insight into what help might be available to them,” said Morrissey.
Will more people place their assets and pensions outside of the UK?
The so-called stealth tax raids unveiled in the Autumn Statement will “logically” prompt people to move financial assets out of the UK, predicts deVere Group’s James Green.
The Investment Director said: “The sly freezing of allowances and thresholds while inflation runs in double digits intentionally drags more people into higher tax brackets and hits their real wealth – all done in a politically convenient way for the government.”
One of the measures set out by the UK chancellor is the extension of a freeze in the inheritance tax ‘nil-rate band’ from 2025-26 to 2027-28, a move that would raise at least half a billion pounds for the Treasury, according to the investment consultancy.
Ahead of the Autumn Statement, James Green noted: “The inheritance tax (IHT) net is being extended. IHT is very obviously no longer just for the super-wealthy, as it was originally intended.
“It’s impacting more and more middle-class families whose main asset is their family home,” he said.
He added that leaving a legacy to loved ones “is a very human instinct” and people feel “especially aggrieved by this form of tax [IHT] because it is, in effect, a form of double taxation as tax is being paid on assets which have already been paid for and previously taxed.”
With this in mind – and because more people are now being affected by it thanks to the Autumn Statement, and no doubt because there is an ageing population – James Green said: “We expect a significant surge in the number of people seeking to reduce the inheritance tax burden by exploring international options to protect their real wealth, including transferring their retirement funds outside the UK.”
“When your retirement funds are transferred overseas into a pension scheme based outside the UK, but that still meets HM Revenue & Customs (HMRC) rules, they’re not typically subject to inheritance or income tax in the UK.
“In addition, after paying initial tax on transfer, you can often benefit from a much lower tax rate, amongst other benefits.”James Green, deVere Group
The deVere Group Investment Director said the Autumn Statement delivered “another painful body blow to millions” and that he and his colleagues expect many people will logically conclude that there are “fewer than ever incentives for them to keep their financial assets in Britain.”
What the OBR had to say:
- In the UK, CPI inflation is set to peak at a 40-year high of 11 per cent in the current quarter, and the peak would have been a further 2½ percentage points higher without the energy price guarantee (EPG) limiting a typical household’s annualised energy bill to £2,500 this winter and £3,000 next winter.
- Rising prices erode real wages and reduce living standards by 7 per cent in total over the two financial years to 2023-24 (wiping out the previous eight years’ growth), despite over £100 billion of additional government support.
- The squeeze on real incomes, rise in interest rates, and fall in house prices all weigh on consumption and investment, tipping the economy into a recession lasting just over a year from the third quarter of 2022, with a peak-to-trough fall in GDP of 2 per cent.
- Unemployment rises by 505,000 from 3.5 per cent to peak at 4.9 per cent in the third quarter of 2024.