The Autumn Statement on 17 November provided a big boost to pensioners, from raising the State Pension to announcing additional cost of living payments. But Chancellor Jeremy Hunt was far from universally generous, heavily targeting wealth saved and invested outside of a pension or ISA.
So, for those trying to avoid the Treasury tax grab, pensions and ISAs have become more attractive places to keep your money growing tax-free. We take a look at some of the need-to-know impacts on our pension savings and pension incomes.
State Pension increases
The State Pension will rise by 10.1% from April 2023, in line with September 2022’s inflation figure. This keeps the ‘triple lock’ on the State Pension that ensures it rises in line with the highest of; earnings, inflation, or 2.5%. The move will cost the Treasury £9 billion.
The full State Pension, for those retiring after April 2016, will rise to £203.85 per week or £10,600 per year – taking it above the £10,000 benchmark for the first time. The maximum basic State Pension, payable to those who reached State Pension age before April 2016, will rise from £7,376.20 to approximately £8,121 a year (£156.18 a week).
It was also announced that pensioners will receive an extra cost of living payment of £300 in the tax year 2023/24. Additionally, Pension Credit, paid to the poorest pensioners to top up their State Pension, will be uprated by 10.1% from April 2023. They’ll also be in line for cost-of-living payments of £900 in 2023/24. Many public sector pensions in payment will also increase by 10.1% in 2023/24.
Dividend allowance cut
In the 2023/24 tax year, the dividend allowance will be reduced from £2,000 to £1,000. It’ll be further halved from tax year 2024/25 down to £500. The dividend tax changes means more people will be paying tax from their investments. It’s also a real blow to business owners, many of whom pay themselves dividends in lieu of salaries. However, it’s not all bad news as there are still ways to save in a tax efficient way, such as into a pension or ISA.
This year (2022/23) a basic rate taxpayer with £20,000 in dividends outside of a pension or ISA will pay £1,575 in tax. A higher rate taxpayer will pay £6,075 in 2022/23.
Assuming dividend tax rates remain the same, in 2023/24, once the £1,000 cut to the dividend allowance comes in, a basic rate taxpayer will pay £1,662.50, and a higher rate taxpayer will pay £6,412.50.
And in the tax year 2024/25, when the dividend allowance drops to just £500, a basic rate taxpayer will pay £1,706.25, and a higher rate taxpayer will pay £6,581.25.
Higher rate tax threshold down
The threshold at which the top rate of tax is payable has been cut from £150,000 to £125,140 from 6 April 2023. This means that anyone who had earnings of £150,000 previously paid 40% on the amount above £125,140 and, from the start of the new tax year they’ll pay 45%, at an additional cost of £1,243 in tax.
Capital gains tax allowance cut
Capital gains tax (CGT) is paid on things like buy-to-let landlords selling their properties, or gains on investments outside of an ISA or pension. While the rate of tax hasn’t changed, the amount you pay tax on has. This is because the capital gains tax free allowance is being cut from its current level of £12,300. For the tax year 2023/24, it’ll be more than halved to £6,000 and then lowered again to £3,000 in 2024/25.
CGT is usually charged at 10% to a basic rate taxpayer for any gain falling within that tax band, and then usually 20% for any gain falling in the higher rate tax bracket.
So a basic rate taxpayer with gains over the current tax-free limit will face an additional cost of £630 in 2023/24, while a higher rate taxpayer will be paying £1,260 more in tax in 2023/24.
Assuming the CGT rates remain the same, in 2024/25, this rises to an extra £930 for a basic rate taxpayer, and £1,860 for a higher rate taxpayer.
Laura Miller is a freelance financial journalist.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.