Autumn Statement - Tax increases across the board as UK enters recession

In his Autumn Statement on Thursday 17 November the Chancellor announced a reduction in the threshold at which the 45p top rate of income tax will begin. A freeze on income tax thresholds means an extra 92,000 people will be paying income tax and 130,000 will be paying the higher rate in 2027-28. Meanwhile, the tax-free allowance for capital gains will reduce by more than three quarters.

The Office for Budget Responsibility said the tax burden – the ratio of taxes as a share of GDP – will peak at 37.5 per cent, with this its highest level since the end of the Second World War. The OBR said over £100 billion of additional fiscal support over the next two years cushions the blow of higher energy prices, but the economy still falls into recession and living standards will fall seven per cent over two years, wiping out eight years’ growth.

Over the medium term, around £40 billion in tax rises and spending cuts offsets higher debt interest and welfare costs and gets debt falling as a share of GDP, says the OBR. But at 99 per cent of GDP at the forecast horizon, debt is roughly £400 billion higher than forecast in March and interest costs close to historic highs.

Key tax announcements in Autumn Statement 2022:

Personal taxes

• Income tax: Reducing the threshold for 45p rate from £150K to £125,140. Other IT thresholds frozen until 2028.
• Dividend allowance cut from £2,000 to £1,000 (2023) then £500 (2024)
• CGT allowance down to £6,000 (2023) then £3,000 (2024)
• IHT threshold unchanged to April 2028
• From 2025 electric vehicles no longer exempt from VED. Company car tax rates will remain lower for electric vehicles

Business and indirect taxes 

• Employer NICs threshold frozen until 2028.
• VAT threshold will be frozen till Mar 2026. 
• OECD BEPS project - reforms will be implemented making sure UK gets fair share. Along with anti-avoidance measures this will raise further £2.8 billion by 2027-28.
• Windfall tax - rate increasing from 25 per cent to 35 per cent; will continue to March 2028; also new temporary 45 per cent levy on older renewable and nuclear electricity generators - together these will raise £14 billion next year
• Business rates - proceed with revaluation but will soften blow with £14bn tax cut / relief scheme.
• R&D credits - Government making SME scheme less generous and large business scheme more generous. They will cut deduction rate for SME scheme to 86 per cent and credit rate to 10 per cent but increase the rate of the separate R&D expenditure credit from 13 per cent to 20 per cent.
• The Government has decided not to introduce an online sales tax. This ‘reflects concerns raised about an OST’s complexity and the risk of creating unintended distortion or unfair outcomes between different business models’.

The full set of documents list is here. You can read a summary of CIOT, LITRG and ATT reaction here.

What we did not see

There was no movement on non-doms. After this week’s Autumn Statement, Hunt said he would rather the super rich ‘stayed here and spent their money here’ after he was questioned over why he did not change the rules. Hunt argued that scrapping the tax loophole, a policy Labour has suggested, would ‘damage the long-term attractiveness of the UK’. He said the Treasury did not tell him it was going to help the economy to do this, that is why he chose not to do it.

Despite a Financial Times article this week saying Making Tax Digital (MTD) for VAT has ‘caused havoc’, sparking wider concerns about the UK tax authority’s plans to overhaul its systems, there was no mention of any changes to the timetable for MTD for Income Tax.

The Sun on Sunday had speculated on a new property levy on ‘foreign millionaires who own posh homes in the UK while living overseas’ but nothing happened. We also saw nothing on the simplification of VAT rules for land and property despite it being something Rishi Sunak had consulted on while Chancellor.

Political reaction

Vocal about Autumn Statement 2022 : (left to right) Reeves, Hunt and Sturgeon

In her speech in the House of Commons immediately after the Statement, Labour Shadow Chancellor Rachel Reeves summed up her thoughts on 12 years of ‘Conservative chaos’: growth dismal; investment down; wages squeezed; and public services crumbling. Reeves said no other advanced economy is cutting spending or increasing taxes on working people as they head into a recession, claiming ‘this government has forced our economy into a doom loop – where low growth leads to higher taxes, lower investment, squeezed wages, and the running down of public services’.

The Shadow Chancellor accused the Chancellor of deploying a raft of new stealth taxes taking billions from working people, saying ‘a Conservative double whammy… sees frozen tax thresholds and double-digit inflation erode the real value of people’s wages’. She lamented that the Government is forcing local authorities to put up council tax, a lack of a ‘real industrial strategy’ that gives businesses certainty, contrasted unflatteringly government calls for wage restraint with lifting the cap on bankers’ bonuses.

Reeves decried the failure to clamp down on non-doms, saying the current policy is a tax-free income for millionaires, while millions face frozen tax allowances and council tax hikes. She lamented that equity fund managers earning millions benefit from a tax break on their bonuses which means they pay far less tax as a proportion of their income than ordinary workers. She welcomed the extension of the energy windfall tax but complained of the remaining ‘massive tax breaks to those oil and gas giants for doing things they were going to do anyway’.

On its website, the Lib Dems gave their view on the Autumn Statement, which is that, after crashing the economy and sending mortgage bills spiraling, the Government is now inflicting ‘eye-watering tax hikes’ and real-terms cuts to our public services. The party said the Prime Minister has his priorities wrong in determining to press ahead with cutting taxes for big banks, and said almost six million people are being dragged into a higher tax band by the freezing of tax thresholds. After inflicting so much chaos, the Conservatives are making the rest of us pay to clear up their mess, they said. The Lib Dems are calling on the Government to bring in a ‘proper windfall tax’ and make sure banks pay their fair share, instead of imposing years of painful stealth taxes on ordinary families as living standards drop and public services face real-term cuts.

The Green Party has condemned the Chancellor’s ‘Austerity 2.0’ budget. It said the problem is that wealth is concentrated in too few hands when it should be spread throughout the economy to the benefit of everybody. The party suggests taxing the wealth of the richest one per cent of households to raise at least £70 billion, imposing dirty profits taxes, without any loopholes, on the oil and gas companies and provide increased funding for the Environment Agency and Ofwat.

In Holyrood, Scotland’s First Minister Nicola Sturgeon (also the SNP Leader) said the UK is almost unique among wealthier countries in reintroducing austerity. It is the wrong approach and will have a significant adverse impact on people and public services across Scotland, she said.

Welsh Finance Minister Rebecca Evans (Labour) was disappointed by the announcement by the UK Government in respect of the additional funding to come to Wales. It does not even begin to address the gap that Welsh Government expects to have in our finances next year because of the impact of inflation, she said, adding there will be impacts on public services and we need to ensure we protect the most vulnerable. She said a lack of new capital funding meant the Welsh government may have to deliver projects over longer periods and scale back the ambition of others.

“What was needed today was a credible plan to rebuild public services and grow the economy through investment in health, skills, and the transition to net-zero,” said Sinn Féin’s finance spokesperson Conor Murphy. “Instead, the Tory budget announced today will push us deeper into an unnecessary recession.”

Think-tanks and economists

Resolution Foundation (RF) points out the fast-rising debt interest bill, saying the consolidation is entirely driven by tax rises in contrast to the post-financial crisis fiscal tightening. The reliance on stealthy threshold freezes rather than more visible rate rises does raises fairness questions, says RF, while the decision to raise almost £5 billion through higher council tax is poorly targeted. RF’s report says that average real household disposable incomes are forecast to fall by 7.1 per cent over this year and next – equivalent to £1,700 per household – returning to 2014 levels. The think-tank concludes that accounting for all announcements this Parliament, policy decisions – and the freeze to personal tax thresholds in particular – are deepening the squeeze for all but the poorest quarter of the population (who gain more from increases to universal credit generosity than they lose from tax rises).

The Institute for Fiscal Studies (IFS) conclude that, hemmed in by rising interest payments and poor growth prospects, Hunt decided to allow borrowing to rise, and to put off properly tough decisions for another couple of years. What we are really doing is reaping the costs of a long-term failure to grow the economy, the effects of population ageing, and high levels of past borrowing, according to IFS.

After years of stagnation household incomes are set to fall and then recover only gradually, while taxes rise, and public services continue to struggle, IFS say. “The truth is we just got a lot poorer”, and “we are in for a long, hard, unpleasant journey; a journey that has been made more arduous that it might have been by a series of economic own goals”.

The IPPR said the chancellor’s reform to CGT is forecast to raise just £435 million in 2026/7, dwarfed by the £12 billion that could be raised in the same period if the Government embraced taxing capital gains at the same rate as the income tax schedule.

The Institute of Economic Affairs (IEA) comments that the growth strategy is all top-down, when what we need is bottom up, supply side reforms. Planning liberalisation has been largely shelved, retained EU red tape will remain in place for longer and plans to increase domestic energy supply through shale gas – when the country faces crippling energy costs – have gone. Instead, we will levy ‘extortionate’ taxes on the North Sea and electricity generation, which will discourage investment and make us more reliant on imported energy and more at risk of blackouts, they conclude.

Adam Smith Institute (ASI) said entering a recession promising the highest tax burden in three-quarters of a century does not strike the right balance between fiscal credibility and growth. The Chancellor highlighted the harms of inflation, then ‘added fuel to fire’ by threatening yet more tax threshold freezes – undermining productivity whilst hitting the pockets of people across the income spectrum. There were some positive steps on making support for vulnerable households more targeted, but little in the way of genuine pro-growth reform: the only sustainable way of tackling debt, improving public services and giving people the chance of a better future, said ASI.

Elsewhere, the Social Market Foundation (SMF) said maintaining the triple lock is a crude and wasteful way of looking after those pensioners who are in need, because it means handing more and more cash to the large numbers of pensioners who are quite comfortably off. SMF also said this was a missed opportunity for the Chancellor to develop a routemap to a more sustainable approach to road travel and tax, culminating in a system of road pricing.

Loopholes mean that oil and gas giants will be able to avoid more than half of the Government’s updated windfall tax, according to analysis from the New Economics Foundation (NEF). The analysis finds that, under the latest changes to the windfall tax, oil and gas companies will keep £52 billion of their profits over the lifetime of the policy. This results in fossil fuel companies retaining 73 per cent of the profits they would have retained without the windfall tax.

Other reaction

The TUC said public sector key workers face years of ‘pay misery’ as departmental budgets are ‘brutally squeezed’. The Government cares more about City bankers than nurses, says the TUC, and said ministers will do the ‘bare minimum’ on benefits and low pay.

The British Retail Consortium (BRC) said the Government has taken an ‘essential step’ towards longer term reform of the ‘broken’ business rates system by announcing the scrapping of downwards phasing of transitional relief. This decision means that April’s bills reflect market conditions and retailers will pay only what they owe, rather than being forced to overpay their rates bill when the value of their property has already fallen. This represents the first step towards a more fundamental reform of the broken business rates system.

The British Property Federation said businesses across the UK are facing unprecedented cost pressures so they are pleased the Chancellor has frozen the business rates multiplier and introduced further reliefs, to help prevent a tide of insolvencies on the high street. Many high street businesses have been paying artificially high rates bills for years and the Chancellor has recognised this is simply not sustainable, they say.

Citizens Advice (CA) said support with energy bills, extending the cost-of-living payments and uprating benefits with inflation will offer much-needed reassurance for some, but many will still fall through the cracks. Investing in energy efficiency measures, like home insulation, will be key to bringing down people’s bills in the long run. But with the extra funding only available from 2025, it does little to support people struggling now, says CA.

By Hamant Verma, CIOT Senior External Relations Officer