Budget Update: Millions still face higher taxes

Millions of workers in the UK will continue to face tax increases as the Chancellor, Jeremy Hunt, left tax thresholds unchanged in his Spring Budget update.

Despite announcing reforms that will benefit higher-earning pension savers, taxes such as income tax, national insurance, inheritance tax, capital gains tax, and dividends will remain frozen or subject to cuts. In fact, changes announced in November have shown that thresholds and allowances on these taxes will be frozen until 2028, while tax-free allowances on capital gains and dividends will be halved next month and again the following year.

Personal taxes will be affected by "fiscal drag," which will pull more Britons into higher tax brackets. Income tax thresholds have been frozen since 2021, and despite self-assessed income tax receipts increasing by a third year-on-year in January to £21.9bn, they will remain frozen. In April 2023, the threshold at which the highest earners pay the 45p income tax rate will fall from £150,000 to £125,140 in England, raising an estimated £3.8bn cumulatively over the next five years. Those already in the higher rate bracket will pay almost £1,250 more in tax.

Furthermore, investors will face the reduction of the capital gains tax-free allowance from £12,570 to £6,000 next month, drawing an extra 250,000 taxpayers into the CGT net. The allowance will be cut again in 2024 to £3,000. From April 2024, those liable for CGT will pay up to £2,604 more than they do currently.

People who receive income via dividends, such as small business owners, entrepreneurs, and investors, will also be affected as the dividend tax allowance drops from £2,000 to £1,000 in the new tax year, then to £500 from April 2024. The cutting of the dividend tax allowance to £1,000 will cost basic rate taxpayers £87.50, higher rate taxpayers £337.50, and additional rate taxpayers £393.50 next year. It is forecasted that slashing the dividend tax allowance will raise £3.08bn in the five years to 2027-28.

Finally, the inheritance tax threshold will remain at £325,000 until 2028. Tax receipts from inheritance tax have increased from £2.3bn in 2009 to £6bn in 2021 as property prices have surged, but the threshold has remained the same since 2009. Pension funds are typically outside the scope of inheritance tax, which makes scrapping the lifetime allowance a viable option for increasing the amount that can be passed on through pensions without additional tax charges. It is expected that more people will use pensions for inheritance tax planning and take money from Isas and other investments, which are subject to inheritance tax, before accessing their pensions.