Ten potential tax raising measures in UK Government's Autumn Statement

UK Chancellor Jeremy Hunt is reportedly looking for ways to raise billions via additional taxes to help plug a £50 billion hole in the nation's finances, say AJ Bell's analysts.

They will cover the following potential measures:

•    Freeze on income tax thresholds
•    Extending the inheritance tax freeze
•    Dividend tax
•    Capital Gains Tax
•    Scrap higher-rate pensions tax relief
•    Cut the annual allowance
•    Reduce or freeze the lifetime allowance
•    Increase pensions taxation on death
•    State pension triple-lock
•    Energy company windfall tax

Income, Inheritance, Dividends and Capital Gains - Laura Suter, head of personal finance at AJ Bell:

1.    Freeze on income tax thresholds

"Stealth tax freezes generate far fewer negative headlines than hiking tax rates or lowering thresholds, so it's understandable that the new chancellor looks to be eyeing up a huge swathe of them. The added bonus is that the new prime minister can also claim he hasn't broken election promises of raising taxes. Rishi Sunak already announced tax threshold freezes until 2026, but in a bid to improve the longer-term finances of the country he could be set to extend this until 2028. 

"The government is banking on the fact that the average taxpayer doesn't fully understand the financial impact of freezing allowances, and so hoping the move slips under the radar of many. But the combination of frozen allowances and soaring inflation is toxic for people's finances. Most workers aren't getting a pay rise that keeps up with the rate of rising prices, and then more of the pay rise they do get will be gobbled up by tax. 

"The tax band freeze has already led to predictions of a 50% leap in the number of additional rate taxpayers in the current tax year and a 44% increase in those paying the higher rate of tax, as high inflation pushes up wage growth and more people into higher tax bands. Someone earning £47,500 last year who saw average wage growth* would now have tipped into the higher-rate tax bracket. Meanwhile someone who earned £142,00 last year would now have seen their wages rise to above £150,000 and have moved into the additional rate tax bracket."

*Based on, average wage growth of 6% from latest ONS wage figures: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/averageweeklyearningsingreatbritain/october2022

2.    Extending the inheritance tax freeze

"Jeremy Hunt is also expected to freeze the inheritance tax bands for another two years - pushing more people into paying death tax. Despite just 1 in 25 deaths leading to inheritance tax being paid last year, it's still widely regarded as the UK's most hated tax.

"Extending the freeze from the current 2026 to 2028 will mean that the £325,000 tax-free allowance will be unchanged for almost two decades, during a period where house prices and other asset prices have risen dramatically. This is reflected in the government's tax take, with £6.1bn paid in IHT in the past tax year - a more than £700m increase on the previous year. 

"The freeze will make inheritance tax more mainstream and start hitting those who wouldn't class themselves as wealthy, particularly if they aren't eligible for the fiendishly complex residence nil rate band allowance." 

3.    Dividend tax

"Government tax changes are moving so fast taxpayers risk getting whiplash from the constant switches in direction. Dividend tax was set to be slashed from April next year, with the former chancellor promising in the mini-budget that the rates would be cut and the additional rate abolished altogether. Now they are looking down the barrel of a rate hike or their tax-free allowance being slashed.

"Any changes to dividend rates would affect the 2.6 million investors and company directors who pay tax on their dividends. But a move to cut the tax-free allowance would affect more people, who currently don't pay any tax on their dividends because their annual pay-outs are within the limit.

"One option could be to simply raise rates from where we are. The previous 1.25 percentage point hike was expected to generate £1.4bn for the government, so another increase by 1% would raise a similar amount. The move would also bring dividend tax rates closer to income tax rates for higher and additional rate payers.

"Another option would be to cut, or scrap entirely, the £2,000 tax-free allowance for dividends. Scrapping it entirely would mean lots of people earning very little in dividends would have to file a tax return, meaning the administration would likely cost more than the tax take for those taxpayers. A more workable option would be cutting the allowance to £1,000 or £500.

"The move would not be popular. Investors and company directors getting dividend payments have faced a continual hike in tax over the past six years with rates being increased and the tax-free allowance having been slashed already."

4.    Capital Gains Tax

"Increasing so-called ‘wealth taxes' could be a popular move with the wider public. A previous Office for Tax Simplification review put the idea of scrapping the current capital gains tax rates and replacing them with income tax rates on the table. However, a crucial part of that recommendation was that investors should also be given an inflationary relief, so they are only taxed on above-inflation gains. That final part may be ignored by the government to try to improve their tax take. 

"Capital Gains Tax already generated £14.3bn last year for the government, with rising asset prices, house prices and frozen allowances all helping to push this up by 42% in the past year. A hike in rates from the current 10% to 20% for basic-rate payers, or 20% to 40% for higher rate payers would significantly boost government coffers.

"A less radical move would be for the government to cut the tax-free allowance from its current £12,300. The allowance has already been frozen until 2026, but Rishi Sunak could go one step further and cut the allowance. Chopping it in half, to £6,000, would generate £480m, while cutting it to £2,500 would give an £835m boost to government coffers, according to OTS predictions."

Pensions - Tom Selby, head of retirement policy:

5.    Scrap higher-rate pension tax relief

"The sword of Damocles appears to be constantly dangling over higher-rate pension tax relief, and it has become something of a tradition for rumours to emanate from the Treasury about its imminent demise ahead of Budgets and Autumn Statements. This is perhaps inevitable given the total net cost of pension tax and National Insurance (NI) relief was estimated at close to £50 billion in 2020/21.

"While successive chancellors have chipped away at pension tax allowances, higher-rate relief has remained untouched, despite estimates scrapping it could deliver an annual saving of around £10 billion.

"There are plenty of reasons why this might be the case. Most obviously, scrapping higher-rate pension tax relief would hit middle England directly in the pocket - a section of society the Conservative Party can ill afford to alienate. 

"Automatic enrolment also remains relatively fragile - particularly given millions are facing a cost-of-living squeeze - and there may be concerns scrapping higher-rate relief could spur a rise in opt-outs. 

"What's more, the government would risk standing accused of intergenerational unfairness, given older generations will have had the chance to benefit from higher-rate relief, while younger workers would have the rug pulled from under them.

"But it is also entirely unclear how this would be applied to defined benefit (DB) schemes, and in particular the public sector. Whatever the method, the end result would be whacking great tax bills for large numbers of public sector workers. 

"Pensions are already creating a significant squeeze on the NHS, and landing doctors with another tax bill to cancel out their higher-rate pension tax relief would risk a backlash of biblical proportions."

Potential impact of scrapping higher-rate pension tax relief*

*Assumes entire pension contribution qualifies for higher-rate tax relief

**Assumes higher-rate relief is invested each year and enjoys 4% investment growth after charges

6.    Cut the annual allowance

"It is entirely possible the Treasury chose to raise the possibility of a dramatic and hugely controversial scrapping of higher-rate tax relief in order to soften the blow of pension tax tweaks elsewhere. 

"One option could be to reduce the annual allowance, which currently stands at £40,000 and controls the total value of tax-incentivised contributions that can be made to a pension each tax year. If you breach the annual allowance, a charge will be applied which removes the upfront tax relief you received.

"Such a move would be less seismic than ditching higher-rate relief but would not be without problems or controversy. Once again, the big sticking point will likely relate to DB schemes - and specifically the NHS scheme.

"The British Medical Association (BMA) has previously warned the spike in inflation we have seen this year could lead to NHS practitioners being hit with pension tax charges running into tens of thousands of pounds1 - and that is assuming the annual allowance remains at £40,000. 

"If the annual allowance is cut, there will clearly be a risk of more early retirements, placing further strain on the NHS."

1 GPs face huge pension tax bills this year after rise in inflation | The BMJ

7.    Reduce or freeze the lifetime allowance

"Perhaps the most likely option - and one that has been floated already - would be to extend the freeze in the lifetime allowance. The lifetime allowance controls the total amount you can build up in your pension or pensions over the course of your life. 

"If you exceed the lifetime allowance when your fund is ‘tested' by HMRC, you will face a lifetime allowance tax charge of up to 55% on the excess.

"The lifetime allowance currently stands at £1,073,100, having already been frozen at this level by Rishi Sunak when he was chancellor in March 2021. Given the spike in inflation we have seen since then, the commensurate saving to the Exchequer will have risen as well.

"By extending the lifetime allowance freeze beyond the current planned end date of 2025/26, the Treasury may be able to pocket a few quid. However, it will also drag increasing swathes of middle Britain - again including public sector pension members - into the orbit of the lifetime limit."

8.    Increase pensions taxation on death

"Defined contribution (DC) pensions benefit from generous tax treatment on death under the current rules. 

"If you die before age 75, you can pass on funds tax-free to your nominated beneficiary (or beneficiaries). If you die after age 75, your beneficiary (or beneficiaries) will be taxed on the money in the same way as income when they come to make a withdrawal.

"The Treasury could introduce a tax charge on death to raise extra revenue from retirees hoping to pass money onto loved ones tax efficiently. However, this too would come with significant challenges.

"Firstly, being able to pass on funds tax-efficiently on death will have been one of the primary motivations for contributing to a pension for some people. Slapping a new tax on that money would therefore leave many feeling like the chancellor has pulled the rug from under their inheritance plans.

"Secondly, it would risk being deeply unpopular, with predictable headlines of ‘pensions death tax' likely to follow. Given the proximity of the general election, this might be enough to put Hunt and Sunak off going down this road."

9.    State pension triple-lock

"The Autumn Statement will hopefully bring to an end the saga over whether or not the state pension triple-lock will be honoured next year.

"The triple-lock guarantees the state pension increases each year in line with the highest of average earnings, CPI inflation or 2.5%. September's inflation figure is traditionally used for the triple-lock, implying a whopping 10.1% increase in the value of the state pension in April 2023.

"While former prime minister Liz Truss committed to the triple-lock during her final PMQs appearance, the current PM and chancellor have been unwilling to do so. This is perhaps understandable given an inflation-linked increase could cost in the region of £5 billion more than an earnings-linked rise. 

"However, failing to honour the triple-lock for a second consecutive year would be a huge risk given where the Conservative Party finds itself in the polls. 

"If the triple-lock is retained and the state pension is uprated by 10.1% next year, the full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.85 per week (£10,600.20 per year) from April next year.

"The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase from £141.85 per week to £156.20 per week (£8,122.40 per year).

"However, if earnings growth for the three months to July (5.5%) is used instead, the full-flat rate state pension will rise to £195.35 per week - £8.50 per week (or £442 per year) less than a 10.1% inflation-linked increase.

"The basic state pension will rise to £149.65 per week - £6.55 per week (or £340.60 per year) less than a 10.1% inflation-linked increase."

10.    Energy company windfall tax

Danni Hewson, financial analyst:

"For the man on the street, or at least the person paying the household energy bill, upping the level and duration of windfall tax seems like a no-brainer. With headlines screaming of record profits at energy giants while people struggle to find the cash just to turn on the kettle, many people have been left with a nasty taste in their mouth and even Shell's outgoing boss has acknowledged windfall taxes are likely to be a ‘societal reality'. On the face of it, plugging the treasury coffers with money that's blown off the windfall tree delivers an easy win but in reality, the chancellor has to pick his way carefully across a tightrope that's slicked with some of the black stuff at the heart of the debate. 

"BP has already handed over millions thanks to the energy profits levy but so far Shell has neatly avoided the tax by instead investing in North Sea oil and gas projects which triggered an offset in the form of investment relief, though it has written down hundreds of millions it expects to pay in the first quarter of next year. It was investment the government was worried about curtailing particularly when it needs big business to really focus on the shift to clean energy while keeping the lights blazing during that shift. 

"Making more changes after the terms of the deal have been agreed won't sit well with businesses. If they can't trust the UK government to play by the rules it sets, they might look elsewhere to ply their trade - it's not as if these aren't multi-national companies with plenty of nations clamouring for their patronage. Extending it to electricity generators is also back on the table with discussions about a cap on the renewables sector to stop them cashing in on surging wholesale prices which are linked to gas prices. 

"Quick wins might score points with voters and they might help fill that gaping hole in the public finances, but they can have other, unexpected consequences. The energy sector needs fundamental and sustainable changes and that will require good will and good amounts of cash. 

"But the cost-of-living crisis is focussing minds and the government knows it needs to win over hearts as well."