Autumn Statement 2022 - “Decisions of eye-watering difficulty”

Yesterday the Chancellor Jeremy Hunt announced the Autumn Statement 2022 and the Office of Budget Responsibility (OBR) released its much anticipated updated assessment of the UK economy. This announcement is the culmination of nearly 2 months of uncertainty and change in the upper echelons of UK politics. The mini-budget announced on 23rd September 2022 has been acknowledged to have contained ‘mistakes’ and since then many of the faces behind the despatch box have changed. The UK has a new Prime Minister (the third this year) and Chancellor (the fourth). The current so called fiscal ‘black hole’ in the UK’s public finances has been estimated at around £55 billion. Based on the measures announced yesterday, the government is seeking to balance the books via a mixture of spending cuts and raising taxes.

This Autumn Statement provides some clarity around how the Conservative Government is to achieve its aim of “facing into the storm” and in restoring the UK’s economic credibility on the global stage.

Personal Taxes

Stating that ‘those in the highest income households will contribute more’, the headline change is the lowering of the threshold for the additional rate of tax from £150,000 to £125,140. In practice this brings the top 2% of earners in the UK into the 45% additional rate and will cost those earning over £125,140 per annum an additional £1,200.¹ The Government estimates the lowering of the additional rate threshold will raise £80m in 2022-23, £420m in 2023-24, rising to £790m in 2024-25.² This stands in stark contrast to the abolition of the rate which was announced less than 8 weeks ago as part of the mini-budget by the then Chancellor Kwasi Kwarteng, which was swiftly unwound by Jeremy Hunt when he assumed the role on the 17^th October 2022.

To avoid increases to the headline rates of tax (which would break the Conservative Party’s 2019 manifesto commitment), the Chancellor has favoured an extension to the freezing of tax rates and thresholds instead, which will now be extended from 2026 until 6^th April 2028. This includes the Personal Allowance, higher rate threshold, main National Insurance thresholds and the Inheritance Tax (IHT) thresholds. As a result, as wages increase a larger proportion of earners in the UK will pay tax and / or pay tax at higher rates.

Finally, the dividend allowance has been reduced from £2,000 to £1,000 from 6th April 2023 and £500 from 6th April 2024. The dividend ordinary, upper, and additional rates of income tax will remain at 8.75%, 33.75%, and 39.35% respectively for 2023/24, although the threshold at which the 39.35% rate will apply will also reduce in line with the additional rate band for other income.

CGT

Rumours that the historically low rate of CGT of 20% would be increased proved unfounded. However, the current Annual Exemption from CGT has been reduced from £12,300 to £6,000 from 6^th April 2023 and to £3,000 from 6^th April 2024.  This in line with the Office of Tax Simplification’s recommendation in its 2020 report “CGT: Simplifying by design” where they called for the Annual Exemption to be reduced to between ‘£2,000 to £4,000’.³  The Government estimates this will raise an additional £25m in 2023-24 rising to £275m in 2024-25 and £425m in 2025-26.⁴

Property taxes

In the mini budget on 23 September 2022, the Government increased the nil-rate threshold of Stamp Duty Land Tax (SDLT) from £125,000 to £250,000 for all purchasers of residential property in England and Northern Ireland and increased the nil-rate threshold paid by first-time buyers from £300,000 to £425,000. The maximum purchase price for which First Time Buyers’ Relief can be claimed was also increased from £500,000 to £625,000. The Government has confirmed these reductions will now come to an end on 31 March 2025.

‘Non-Dom’ regime

Despite speculation that a consultation or immediate changes to the Resident Non-Domiciled (RND) regime may be announced, the regime was not mentioned in the Chancellor’s Autumn Statement. This speculation was driven mainly by increasing pressure from the Labour party and the fallout earlier in the year from the revelation that the then Chancellor, now Prime Minister’s wife had benefitted from the regime.  Separately, the Prime Minister has committed to publishing his tax return by Christmas.⁵

One technical policy change is being made which does impact RND individuals which was released alongside the Autumn Statement.⁶ Individuals who hold more than 5% of shares and securities in a UK close company, and exchange some or all of those securities for an equivalent holding of securities in a non-UK company, will now pay tax on gains, dividends and distribution income received in respect of those securities in the same way as if the securities were a UK company, with no access to the remittance basis on that income or gains. ⁷ This measure has effect for share exchanges, schemes or reconstruction carried out on or after 17^th November 2022.

On the Today Programme, Radio 4 this morning Jeremy Hunt was questioned about measures included in the budget and in particular the notable lack of any mention of the non-dom regime. In response he defended the choice stating that he has ‘tried to avoid doing anything that damages long-term growth’. He was pressed as to whether the Treasury had provided him with a number of what changes to or abolition of the regime would raise in tax revenue which they were unable to do. In addition he maintains that he and the Treasury do not want to damage the ‘UK’s attractiveness’. Finally, his closing remark on the matter was: ‘by the way it was a Conservative idea to introduce this charge for non-doms which is raising millions and millions of pounds and we’ve also increased it significantly, now they pay up to £75,000 [sic – the Remittance Basis charge is £30,000 or £60,000 per annum], so I think it is right they do pay something but I’m not going to do something that is going to damage the long-term attractiveness of the UK, even though it gives easy shots to opposition parties’. So, for now, the status quo for the non-dom regime continues.

Energy Profits Levy

While ostensibly not in favour of extended so-called ‘windfall’ taxes, Jeremy Hunt concedes that businesses making extraordinary profits due to external factors should contribute more. Therefore, in the oil and gas sector the Energy Profits Levy has been extended to the end of March 2028 and the rate increased from 25% to 35% from 1^st January 2023. In addition, the government is introducing a new temporary 45% Electricity Generator Levy. Combined these measures are estimated to raise an additional £14 billion over the next year.

Summary of policies announced today*:

• An extension of the freezing of the basic and higher rate of income tax thresholds and allowances for an additional 2 years until 2028, the freeze was originally planned to end in 2026;
• A lowering of the threshold for the additional rate of tax from £150,000 to £125,140, effectively increasing the number of taxpayers who will be paying tax at the additional rate (45%);
• The tax free allowance on dividends will reduce from £2,000 to £1,000 from 6^th April 2023 and £500 from 6^th April 2024;
• The current tax free Annual Allowance of £12,300 for gains will be cut to £6,000 from 6^th April 2023 and £3,000 from 6^th April 2024;
• An extension to the Energy Profits Levy, commonly referred to as the ‘windfall tax’ on oil and gas companies, which will increase on 1^st January from 25% to 35% and extended until March 2028;
• A temporary 45% levy on electricity generators;
• Increasing the minimum wage by 9.7% from £9.50 an hour to £10.40 (for those over the age of 23) from 1^st April 2023;
• An extension of the threshold freeze to the nil-rate band and the residence nil-rate band for IHT until 2028, increasing the number of people will pay IHT;
• Banks will pay a surcharge of 3% reduced from the proposed 8% (due to the increase in Corporation Tax to 25% from April 2023);
• The rate of diverted profits tax will increase from 25% to 31%;
• The Pensions triple lock will be maintained and state pensions will rise in line with September’s inflation rate of 10.1%;
• Benefits to also rise in line with September’s inflation rate of 10.1%;
• The NIC secondary threshold for employers will remain at £9,100 until April 2028;
• The VAT registration threshold will be maintained at £85,000 for two years from April 2024;
• The new SDLT rates introduced as part of the mini-budget are now a temporary measure continuing until 6^th April 2025;
• Local authorities will have additional flexibility in setting council tax by increasing the referendum limit for increases in council tax to 3% per year from April 2023;
• Local councils with social care responsibilities will be able to increase the adult social care precept by up to 2% per year; and
• From 6^th April 2025 Electric vehicles will no longer be exempt from Vehicle Excise Duty.

Source: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1118417/CCS1022065440-001_SECURE_HMT_Autumn_Statement_November_2022_Web_accessible__1_.pdf

* While some of these measures will impact the whole of the UK, others will only apply to England as the governments of Scotland, Wales and Northern Ireland make some tax and spending decisions independently. The Scottish Parliament and the Senedd will set rates of income tax on non-savings and non-dividend income payable by Scottish and Welsh taxpayers respectively. The Scottish Parliament will also set the tax bands for Scottish taxpayers’ non-savings and non-dividend income.

Measures presumed retained from the mini-budget (still to be confirmed and legislated for):

• EIS and VCT extension beyond the 2025 expiry date;
• Removal of the cap on senior bankers bonuses of 100% of their fixed pay or 200% with shareholder approval; and
• The creation of 38 new low-tax, low-regulation investment zones.

Call it what it is: austerity

The UK faces a challenging path ahead. Chancellor Hunt described the economy as already in recession, a point also echoed in the Bank of England’s own forecasts that see the UK on the brink of its longest recession on record. The OBR’s estimates expect real GDP growth to sink -1.4% next year and the unemployment to increase to 4.9% by 2024 (from 3.6% today). Combined with word this week that inflation notched a new 41-year high (in large part due to soaring energy prices), it’s clear that Britons are in the midst of an acute cost of living crisis. Indeed, the Office for Budget Responsibility now estimates that disposable incomes will decline by 7% over the next two years, the largest drop on record and effectively wiping out the past 8 years of growth. 

That said, over the longer-term, Hunt made it clear that the government continues to support spending in energy (particularly in the renewable space), infrastructure (such as the HS2 rail upgrade), and other innovation-oriented initiatives—all of which, in theory, should support growth further in the future.

On the news, UK government bond yields are falling—with 30-year Gilts now back at pre-“mini-budget” levels, erasing all of the risk premia that plagued investors over the last two months. Sterling is slightly weaker versus the U.S. dollar, but the moves largely seem to be driven by sentiment around the Federal Reserve’s hawkish rate hike path. That said, it is still difficult to see a clear path higher for sterling in the short-term given the weakening economic outlook.

Meanwhile, the UK equity market has outperformed globally this year thanks to a weaker pound that has benefitted exporters and the index’s higher weighting towards energy and interest-rate sensitive sectors. However, given that the UK economy still faces significant risks, we prefer to allocate to other areas in Europe (like France) over the UK, and the U.S. over Europe in general.

Conclusion – it’s a real (fiscal) drag

Having promised ‘decisions of eye-watering difficulty’ and fervent speculation in the media, yesterday’s statement contained fewer changes to personal tax than many had expected.  Technically (but only technically) the Conservatives remain able to claim to have not raised the rate of income tax, VAT or National Insurance, a 2019 manifesto commitment.  The reality is the amount individuals will pay in income tax, VAT and National Insurance has increased under this government as they have frozen tax thresholds during a period of increasing wages and high inflation (otherwise known as ‘fiscal drag’).  After sustained political pressure the government chose to ignore the non-dom regime and CGT saw no increase to the headline rates.  

That being said, one promise has been kept:  everyone will pay more tax. 

¹ https://www.gov.uk/government/statistics/percentile-points-from-1-to-99-for-total-income-before-and-after-tax

² https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1118417/CCS1022065440 001_SECURE_HMT_Autumn_Statement_November_2022_Web_accessible__1_.pdf (p. 59)

³ https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/935073/Capital_Gains_Tax_stage_1_report_-_Nov_2020_-_web_copy.pdf

⁴ https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1118417/CCS1022065440-001_SECURE_HMT_Autumn_Statement_November_2022_Web_accessible__1_.pdf (p. 59)

⁵ https://www.theguardian.com/politics/2022/nov/16/rishi-sunak-says-he-hopes-to-publish-tax-return-by-christmas

⁶ https://www.gov.uk/government/collections/autumn-statement-2022-tax-related-documents

⁷ https://www.gov.uk/government/publications/capital-gains-tax-share-for-share-exchange/capital-gains-tax-share-exchange

All market and economic data as of November 2022 and sourced from Bloomberg, FactSet and Haver Analytics unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

RISK CONSIDERATIONS

• Past performance is not indicative of future results. You may not invest directly in an index.
• The prices and rates of return are indicative as they may vary over time based on market conditions.
• Additional risk considerations exist for all strategies.
• The information provided herein is not intended as a recommendation of or an offer or solicitation to purchase or sell any investment product or service.
• Opinions expressed herein may differ from the opinions expressed by other areas of J.P. Morgan. This material should not be regarded as investment research or a J.P. Morgan investment research report.
• Emerging markets carry higher risks for investors who should therefore ensure that, before investing, they understand the risks involved and are satisfied that such investment is suitable.