Press release

16 Nov 2022

‘The time for pulling rabbits from hats is over’: EY Autumn Statement Predictions, 17 November

While much attention has been on how the Chancellor will balance the books, another key objective from Thursday’s Statement will be to maintain market stability. The time for pulling rabbits from hats is over and we expect the Chancellor to articulate his advance plans to convey certainty and security.

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Chris Sanger, EY’s Head of Tax Policy, comments on the possible direction the Chancellor might take with the first Autumn Statement under the new Prime Minister: 

“While much attention has been on how the Chancellor will balance the books, another key objective from Thursday’s Statement will be to maintain market stability. The time for pulling rabbits from hats is over and we expect the Chancellor to articulate his advance plans to convey certainty and security. Thursday’s update is purportedly an ‘economic statement’ rather than a full Budget and is unlikely to be followed by a Finance Bill. So, whilst the Chancellor is expected to address a number of questions around existing tax policy, this Statement is more about setting out where tax changes will be made at a Spring Budget. 

“While the Chancellor will be determined to balance the books, he will likely also want to avoid exacerbating a recession in the short term by introducing a raft of new tax measures that have an immediate impact on growth. He will have considered the wider context when assessing the much-discussed £50bn ‘black hole’ in the country’s annual finances. The UK currently raises £893bn in tax each year, and, according to the Treasury’s own forecast this will exceed £1trn by 2027, so while £50bn is still a significant number, it will represent just 5% of the country’s tax take in five years’ time. With this in mind, we may see Thursday’s Statement focused on measures that only begin to raise large amounts for the Treasury in two to three years’ time, rather than the introduction of a raft of significant tax measures with immediate effect. An extension to the freeze on income tax thresholds would fit here, as inflation would mean the Treasury’s take would only start to climb significantly in a few years’ time.”  

Chris Sanger comments on Annual Investment Allowance and Corporation Tax:  

“There will be questions around how the UK can remain competitive and incentivise growth while also tightening belts. Relief for larger capital expenditure and encouraging investment by our largest businesses may feature, not least because of the corporation rate rise that is, once again, set to occur in April next year. The Annual Investment Allowance (AIA) has been fixed at £1m, allowing firms to immediately deduct more of their investment costs from taxable profits. This covers all expenditure on new assets for the vast majority of businesses, but there remains a large amount of investment made above this threshold. Extending relief for greater investment would send a clear signal that the government was “open for business” and may go some way to offset the negative impact of the increased tax rate. While 100% relief for all capital expenditure may carry too high a price tag for now, there may be a middle ground, which could include a targeted first year allowance for investment in the energy transition and 'green' investment.” 

“When corporation tax rises to 25% in April 2023, the UK will no longer have the lowest rate in the G20. Twenty-five per cent is a relatively high tax rate in comparison to recent UK history, and it is important to note that when national tax rates rise, exemptions and incentives become more important as a tool to promote growth and investment. The investment zones announced by the previous Chancellor included a number of incentives for business, but the question now is whether the current Chancellor decides to adopt this policy in full, soften it or remove it altogether. Whatever direction the Chancellor takes, business incentives will need to play some role if the UK is to remain competitive internationally.”   

Chris Sanger comments on Energy Profits Levy: 

“There are question marks around further windfall taxation on oil and gas companies. The government’s current 25% levy on profits is set to end in December 2025 but the Chancellor may look to extend this, either in rate or duration, to contribute to balancing the books well into the next Parliament. Sudden changes in tax rate have the potential to undermine future investment, as businesses cannot plan effectively when they’re unable to predict what will need to be paid. Hence, if the levy is extended, the Chancellor may choose to link it directly to a reduction in future oil prices, or even the level of profits.  Either way, it is important that a clear signal is given on Thursday about when the government will consider the current era of “super profits” to have returned to “normal profits”, and hence, when these extra high rates will be removed. 

“It’s also worth remembering that the Energy Profits Levy was costed under the price assumptions prevalent at the time. If this policy was re-costed now, with the latest predictions on how long we can expect oil prices to remain high for, it’s likely that this alone would raise additional revenue, without the need to tinker with the policy itself.  

“The profit levy on oil and gas companies included exemptions to encourage investment and retain access to UK energy reserves. It is often argued that, if firms halted development, it is commercially unviable to start up again, leading to the irreversible loss of resources.  This is used to justify continued investment incentives, but the fact that these apply only to oil and gas assets and not to renewables has led to criticism. The Chancellor may seek to address these concerns. 

“The more that is announced in the “Economic Statement” on Thursday, the more it will feel like yet another full Budget, something that the UK has had far more of than its fair share over the last few months. Policy changes require careful consideration, so we may instead see a return to announcing policy intentions in the Statement and then consulting ahead of implementation in the Spring Budget.  

“There is one policy from September 2022 that many will be hoping the Chancellor may yet reverse. The previous Chancellor announced that the Office for Tax Simplification (OTS) would be abolished at the end of this year. However, it may yet offer valuable, impartial and independent advice for a Chancellor looking for fresh ideas to reform the tax system. It wouldn’t be surprising to see the OTS granted a reprieve on Thursday.” 

Tom Evennett, EY UK&I Family Enterprise Leader, comments: 

“It’s likely we’ll see an extension to the freeze on income tax thresholds, as it’s an option that certainly suits the Chancellor’s needs. It offers the opportunity to significantly increase the Treasury’s tax take in the long term as inflation leads to higher salaries, while in the immediate term it would not pose a threat to growth. This would also be in line with the 2019 Conservative manifesto, which the Prime Minister reaffirmed his commitment to upon assuming office. 

“Pension tax relief currently costs the Exchequer £48.2bn a year and could be another area where we may see change. One option available to the Chancellor would be to restrict relief to a certain amount each year or install a flat rate at which income tax relief is applied, for example, reducing the rate for higher-rate taxpayers from 40p to 25p. However, this may deter high earners from paying into pension pots and instead encourage investment in savings options that offer tax-free interest and more freedom than pension plans, such as ISAs.  

“Alternatively, the Chancellor may revise rules around the tax-free lump sums. Currently individuals are able to withdraw 25% from their pension pot as a tax-free lump sum. The Chancellor may look to reduce this tax-free amount, but in that event would likely only apply the new rules to contributions after a future date. This would clarify that any future income paid into pensions after this date would not be available to be withdrawn as part of the tax-free lump sum. This measure would be highly lucrative to the Treasury in the long term, but would be very difficult politically for this Chancellor, who’d attract the ire of pensioners in the short term and receive little benefit in the near term.  

“Capital gains is an area that may come under review in Thursday’s Statement. The capital gains annual exempt amount, currently £12,300, has built up over time with inflation and is far larger than the dividend allowance of £2,000. We may see this allowance reduced significantly, which could trigger more gains in the short term. For example, under the current £12,300 tax-free limit, some may be tempted to split up to £20,000 of gains on shares in two on the days either side of 6 April 2023 to enable the total to be split over two separate years’ allowances. However, if the exempt amount was reduced to £2,000, the same people may query whether it’s worthwhile splitting their gains across over 9 years and instead trigger the full £20,000 and take the tax hit.  

“Capital gains tax typically doesn't generate large amounts for the Treasury and a one percentage point increase in the main rates would only raise a combined additional £165m a year. This wouldn’t make a significant impact to the £50bn gap in public finances on its own, but the Chancellor may nevertheless want to combine changes here with other measures, such as raising the capital gains rate on the sale of second homes. 

“Lastly on capital gains tax, the perennial question of aligning the rate of capital gains tax rate with marginal income tax rate remains. This link was broken by Chancellor Gordon Brown in the last millennium and the rate has remained different ever since. Aligning the rates would remove the incentive to make gains over income, but would be seen as a big hit, particularly on individuals like entrepreneurs looking to sell their businesses. Any such changes will therefore likely need to be balanced with an increase in Business Asset Disposals Relief (BADR), or there is a risk that successful entrepreneurs would leave the UK rather than remaining to become business angel investors. This entrepreneurial capital is often crucial for the growth of new enterprises and could be a key factor in unlocking the desired increases in UK productivity. 

“The rate of dividend tax was increased by 1.25 percentage points by Rishi Sunak as Chancellor when he increased national insurance contributions. However, this was not reduced when the rise in national insurance contributions was reversed. The current Chancellor may now go further, abandoning the remaining links between dividend taxation and the credit given for tax paid by the underlying companies. Instead, the current Chancellor may align dividend taxation with general income. This would also move some way to addressing the disparity between salaried employees and someone working through their own personal service company and paying themselves in dividends. Raising the dividend tax rate could act to discourage people from setting up their own personal service companies and instead remain as salaried employees. 

“Finally, we may see reform around non-domicile tax relief. Non-doms only pay tax on money brought into the UK, and while this exemption is free for the first seven years it invokes a charge after that. We may see the duration of the ‘free’ exemption shortened, or the cost of the charge raised. However, we could also see consultation on a more fundamental rethink of this policy given the Opposition’s focus upon abolition of this relief.”  

Richard Milnes, UK Banking Tax Partner at EY, comments:  

“Uncertainty hangs in the air for the UK banking sector around its tax bill. Firms will be keen to hear whether the chancellor will keep the banking surcharge at the enacted 3% rate when corporation tax increases to 25% or whether he will opt for a higher rate. This so-called cut is of course actually a 1 percentage point increase in rate.   

“There are a number of factors that will feed into this decision, not least that banks currently face a high tax contribution compared to other sectors and indeed compared to other nations; the UK also still charges a bank levy, an additional tax burden which no other major financial centre charges. An increase to the banking surcharge could have implications for UK competitiveness on the global stage.”