Government coffers swell as threshold freezes take effect
HM Revenue & Customs received £368.5bn in Income Tax, Capital Gains Tax and National Insurance Contributions in the 10 months to January 2023. This is up £44.9bn from the same period a year ago.
Receipts from PAYE Income Tax and NIC1 for the period stood at £312.6bn, £36.7bn higher than in the previous year.
According to Rachael Griffin, tax and financial planning expert at Quilter, given the ongoing cost-of-living crisis, many people have received pay increases, pushing some into the next Income Tax band as a result.
“This is exactly what the Government had been banking on when the Chancellor confirmed the freeze on Income Tax thresholds during his Autumn Statement – thanks to fiscal drag, as more people move up the Income Tax bands while thresholds remain unchanged, the healthier Government coffers will become.”
Griffin added: “With the Spring Budget fast approaching, the Chancellor will be pleased that the changes he announced during his last statement are already having the desired effect – particularly as the reduction of the additional rate of Income Tax threshold is yet to come into play.”
Capital Gains Tax
Capital Gains Tax reached a record high of £13.2bn paid in January alone “thanks to the wealth tax”, Laura Suter, head of personal finance at AJ Bell said.
She said the Government has seen CGT receipts rise 24% when compared to the previous January “as investors rush to lock in gains before the Chancellor’s tax crackdown.”
In the November Autumn Statement, the Government announced the annual exemption for CGT would decrease from £12,300 to £6,000 from April 2023.
It will then fall to £3,000 from April 2024, in a further blow to investors, entrepreneurs and second homeowners.
Suter said: “It means many investors will be cashing in gains up to that limit before the tax year is over, as if you don’t use it, you lose it. However, anyone just cashing in gains up to their tax-free limit wouldn’t incur CGT and so wouldn’t add to these figures.
“But many investors sitting on significant gains are likely to have cashed them in sooner, in the knowledge that the tax environment will be harsher come April. The exodus of landlords from the buy-to-let market will also contribute to these figures, as individuals sell second properties ahead of the April deadline.”
She suggested that for anyone still sitting on gains who hasn’t used up their ISA allowance, they should consider moving the investments into an ISA.
“By using a ‘Bed and ISA’ service, you can realise gains up to the current CGT allowance and instantly buy them back in your ISA. If your gains are higher than your allowance, you could transfer assets to your spouse so they can use their CGT and ISA allowances. Transfers to spouses are exempt from CGT, but if they then sell the assets they’ll face CGT on any profit between what you bought the investment for and what they are selling it for. If you transfer assets to them, they can then cash in the gains and use their annual allowance to avoid a large tax bill,” Suter said.
Between April 2022 and January 2023, Inheritance Tax receipts reached £5.9bn, up £900m on the same period a year earlier.
HMRC said higher receipts in June 2022 and November 2022 can be attributed to a small number of higher-value payments than usual.
Laura Hayward, tax partner at wealth manager Evelyn Partners, said with monthly IHT receipts continuing to show year-on-year increases, “families should give careful thought to their tax planning to minimise the chances of landing themselves a hefty tax bill”.
Hayward added: “All eyes are now on what, if any, changes to IHT Chancellor Jeremy Hunt will announce in his first proper Budget on 15 March. However, even if the IHT regime remains unchanged, many families will still be pushed into its scope given that the nil rate band and residence nil rate band have both been locked into place until at least April 2026. Many have also been brought into its scope by rising houses in recent years.
“Families should look closely at the ways of reducing or eliminating IHT bills. Gifts you make to other individuals are generally not subject to IHT unless you die within seven years. There is also an annual gift allowance of up to £3,000 per tax year, and this will not be subject to IHT even if you do die within seven years. This £3,000 annual allowance can only be brought forward for one tax year, so if you have assets to spare you may want to consider using up this and last year’s allowance before 5 April. Families should also ensure they invest in the most tax-efficient manner possible.”
HM Revenue & Customs brought in a record £16.8bn in stamp duty receipts between April 2022 and January 2023, £1.7bn higher than a year earlier.
Jonathan Stinton, head of intermediary relationships at Coventry Building Society, noted that 2022 was a record-breaking year for stamp duty, even when considering the higher thresholds for the tax introduced by the then-Chancellor Kwasi Kwarteng back in the mini Budget.
Stinton noted that with transaction levels expected to fall this year, it’s likely that the amount spent on stamp duty will drop too, though he emphasised this does not mean that individual homebuyers are not being “hit hard” by the levy.
He continued: “The new thresholds reduced the tax bill on an average priced home in England from £5,767 to £3,303, which is certainly an improvement but still more than double the £1,566 it was in 2014 when the previous thresholds were set. It shows the thresholds simply haven’t moved in line with house price inflation.”