Autumn Budget: what does it mean for your finances?

The Chancellor, Jeremy Hunt, presented his long-awaited Autumn Budget on Thursday. The overriding message from the statement was clear - the UK needs to get its financial house in order.

The Chancellor announced a range of tax hikes and spending cuts as part of his plan to try and get the country’s debt-to-GDP ratio under control by the middle of the decade.

The overall package of tax hikes and spending cuts is designed to raise £55bn for the public purse.

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Here’s a round-up of the most important changes as well as what they might mean for you and your investments.

Tax bands frozen

The biggest change, and the one that will impact most people, is the freezing of tax allowances.

Hunt is freezing all income tax thresholds until 2028, which will drag more people into the higher and additional rate tax brackets as wages rise.

The Office of Budget Responsibility estimates that freezing thresholds until 2028 will create an additional 3.2m new taxpayers. It also reckons 2.6m more people will end up paying the higher rate tax of 40p on earnings.

The Chancellor is also freezing the inheritance tax nil rate band at £325,000.

Despite these changes, Hunt still believes that the UK has some of the “most generous tax allowances of any G7 nation”.

45p threshold reduced

Hunt made it clear in the Budget that he would be asking “those with more to contribute more.”

To that end, he has reduced the threshold at which the top 45p rate becomes payable from £150,000 to £125,140.

These taxpayers will now face an extra £1,200 a year in income tax on average.

Dividend and capital gains allowance will be cut

Those with investments are also going to be asked to pay more.

Hunt is planning to eliminate the dividend tax-free allowance, which currently stands at £2,000 a year.

This will fall to £1,000 in the next tax year and then £500 for the 2024-2025 tax year with the tax rates on dividend income remaining unchanged.

The basic rate of tax on dividend income is 8.75%, the higher rate is 33.75% and the additional rate is 39.35%

The threshold for paying capital gains tax has been halved from £12,300 to £6,000 for the 2023-2024 tax year. It will be cut again to £3,000 in the 2024-2025 tax year.

“Capital gains tax is payable when people sell or gift certain items worth more than £6,000 such as antiques or art, or assets including second homes and shares held outside of an ISA or PEP. Capital gains tax brought in £14.3 billion in the 2020-21 tax year, from 323,000 people.

“Anyone who is concerned they may be liable to pay capital gains tax may wish to consider timing the ‘disposal’ of their assets or alternative forms of ownership, for example holding buy-to-let investments in a limited company structure,” Chris Liebetrau, financial planner at Nutmeg, the digital wealth manage said.

Pensions triple lock

Pensioners may breathe a sigh of relief as Hunt has confirmed that the government will retain its commitment to the state pension triple lock.

He said: "I can today announce that we will fulfil our pledge to the country to protect the pensions triple lock. So, in April, the state pension will increase in line with inflation, an £870 increase which represents the biggest-ever cash increase in the state pension.

While this may come as a relief to many, with the freezing of tax bands, it also means more pensioners may find themselves having to pay taxes.

“One potential consequence is for more pensioners to become liable for income tax. As the full state pension amount of £9,600 rises closer to the personal allowance of £12,570, retirees who have an additional source of income in addition to their state entitlement may find themselves paying income tax,” Nutmeg’s Liebetrau said.

Stamp duty cuts won’t last

In his first and only fiscal statement, Kwasi Kwarteng doubled the threshold at which stamp duty is payable on properties from £125,000 to £250,000 in England and Northern Ireland. He also boosted the exemption for first-time buyers from £300,000 to £425,000.

These changes were intended to stimulate the housing market and remove one of the main barriers to entry for those looking to get on the housing ladder and downsize.

However, Hunt is now planning to reverse these changes in the next few years, although he's planning to keep them for the time being “creating an incentive to support the housing market and the jobs associated with it by boosting transactions during the period the economy most needs it”.

The Chancellor is planning to replace the changes from 2025 with a new scheme.

Energy support will continue, but you’ll pay more

Kwarteng’s Energy Price Guarantee (EPG) is also going to remain in place, but Hunt is going to make users pay more from April.

The EPG for homes and businesses is expected to cost the government £55bn between October and April and Hunt wants to bring down this bill.

"From April, we will continue the Energy Price Guarantee for a further 12 months at a higher level of £3,000 per year for the average household,” he said.

Hunt continued, "With prices forecast to remain elevated through next year, this will still mean an average of £500 support for every household."

Support for businesses

As well as the above, Hunt also announced a range of measures to try and support businesses.

The government will freeze the Employer's National Insurance threshold until April 2028 and retain the Employment Allowance at its new, higher level of £5,000. That means around 40% of all businesses will continue to pay no contributions, according to Treasury calculations.

The Chancellor is also pushing ahead with next year’s business rates revaluation as it is “an important principle that bills should accurately reflect market values."

To “soften the blow on businesses” Hunt is bringing in a £14bn business rate tax cut and a “new government-funded Transitional Relief scheme as called for by the CBI, the British Retail Consortium, the Federation of Small Businesses, and others, benefitting around 700,000 businesses.”

Following reports of abuse and misuse, the Treasury is going to reform the research and development (R&D) tax credits programme for small and medium-sized companies (SMEs).

This programme was introduced to help drive innovation, but according to HMRC, losses to erroneous claims hit at least £469m last year and there were fears these losses could increase exponentially over the next decade.

"I have decided today to cut the deduction rate for the SME scheme to 86% and the credit rate to 10% but increase the rate of the separate R&D expenditure credit from 13% to 20%," Hunt announced in the statement.

Autumn budget spending commitments

Despite warning about “tough decisions” in the run-up to the fiscal event, Hunt still managed to find a bit of spare change to increase spending in some departments.

He said the UK will continue to invest 2% of GDP in defence and he earmarked an additional £2.3bn of funding to help schools while also finding an extra £3.3bn a year for the next two years for the NHS.

Despite these commitments, overall public spending growth will be limited to just 1% a year and the aid budget will remain at 0.5% of GDP after it was cut from 0.7% in 2021.

Hunt also recommitted the government to its plans to deploy £600bn on capital projects over the next five years, including HS2 to Manchester, East West Rail and the “core” network of Northern Powerhouse Rail (NPR). Moreover, government funding for R&D will grow to £20bn by 2024-25 and a second round of the Levelling Up Fund was declared, committing to invest £1.7bn in local projects around the country.

And the Chancellor said the government is giving the green light to a new nuclear plant at Sizewell C in Suffolk. The first contract for the plant will be signed “within weeks”.

One of the biggest spending commitments (apart from the commitment to maintain the triple lock on pensions) was the decision to raise benefits by 10.1% in line with inflation next year. This will cost £11bn.

In addition, there will be further cost of living payments next year. Households on means-tested benefits will receive £900, pensioner households will get £300 and individuals on disability benefits will receive £150.

The market reaction

Hunt stood up to deliver his Budget with the chaos of the Truss-Kwarteng administration still fresh in the mind of many voters and MPs.

Against this backdrop, one of his key objectives would have been to please the financial markets (or at the very least not spook them).

It looks as if he has accomplished this objective.

The pound has rallied against the US dollar over the past 24 hours, while the ten-year gilt yield has traded up slightly to 3.5% although that's still miles below the 4.5% it hit after the Truss debacle.

What's more, despite hiking the existing “energy profits levy” on oil and gas companies from 25% to 35%, increasing the levy from four to six years and levying a new 45% tax on profits of electricity generators over a certain threshold, shares in London’s biggest energy companies are trading higher.

As ever, the devil is in the details. While the new windfall taxes are expected to raise £14bn in the first year alone, Hunt has added some incredibly generous tax reliefs for investment.

Under the new regime, oil and gas companies will be able to claim £91.40 in tax relief for every £100 invested rather than the previous £91.25. Further, “decarbonisation expenditure” will benefit from an even higher rate of relief with every £100 of spending qualifying for £109.25 of tax relief.

Electricity generators will only have to pay the 45% levy on “extraordinary profits,” defined as electricity sold above £75MWh - that’s 1.5 times higher than the average electricity price over the past decade.

The Treasury does not believe this will harm investment as it will only apply to “a portion of excess profits” and generators can still write off investments against corporation tax. The levy will also not apply to electricity sold under the contract for difference (CfD) scheme.