How much Hunt’s stealth raid will cost you

Tough times are ahead. That was the message from the chancellor and the Office for Budget Responsibility yesterday as a huge wave of tax freezes were announced by Jeremy Hunt.

Tom Aylott ran through the main points, while Jonathan Jones gave a round up of how market commentators viewed the government’s latest attempt to fix the dire economic situation the UK is in.

Here, we will run through two of the main changes in detail. First up is income tax, where the chancellor froze lower and higher rate brackets, but reduced the 45% highest tax rate eligibility from those earning £150,000 to £125,140.

Shaun Moore, financial planning expert at Quilter, said it meant a quarter of a million more people would be dragged into the tax rate, just two months after his predecessor had promised to abolish it.

The impact, it must be said, is relatively negligible. Someone earning £130,000 will pay an additional £243 a year in tax which increases to £743 for those earning £140,000 a year and £993 more for those on £145,000.

Perhaps more significant is freezing the lower 20% and higher 40% rates for a further two years – five in total. Quilter’s calculations suggest that if wage growth is 5% per year for the next five years but income tax thresholds remain frozen, someone earning £35,000 today will be £695 worse off in the 28/29 tax year and cumulatively £2,016 poorer overall.

If you earn £50,000 that figure rises to £3,403 worse off in the 28/29 tax year and in total you would be £9,765 poorer over the five-year period. Not an insignificant sum.

Even if wage growth underwhelms at 3%, someone earning £35,000 today would still be £400 worse off in the 28/29 tax year and £1,178 poorer over the five years, while a £50,000 earner would be £1,939 worse off in the 28/29 tax year and £5,592 poorer in total.

The raid on income will make it harder to save, but even those that do manage it will suffer from the chancellor’s moves to cut capital gains tax (CGT) and dividend tax allowances.

The annual tax-free allowance for capital gains will be cut from £12,300 to £6,000 next year and fall to £3,000 from April 2024, which will spell bad news for anyone looking to sell shares outside of a tax wrapper.

Similarly, the tax-free allowance for share dividends is to be cut from next April to £1,000, and subsequently £500 the year after, having most recently been reduced from £5,000 to £2,000 in 2017.

Nobody wants to pay more tax, so making sure as much of your money is in tax-efficient savings such as ISAs is paramount. For those that exceed the £20,000 limit, venture capital trusts (VCTs) and other savings schemes are options, although they typically come with more risk.