If last week’s Budget left you wondering how exactly you’ll be affected, you’re not alone. With the focus on freezing tax thresholds, it’s not easy to see the immediate impact the announcements will have on your personal finances.

According to Ian Haynes, Tax Director for Haines Watts Scotland, many people are trying to figure out what effect the changes are going to have on them:

“They are asking questions like: how will these changes have a direct impact on my pocket? What money will I have leftover? How much tax am I actually going to pay?”

And yet, with so many personal tax thresholds staying the same, there’s a sense of confusion about what the new reality means.

Nicola Goldsmith, Head of Private Client at Haines Watts explains that, rather than seeing an instant rise in their taxes, many people will eventually find themselves paying tax where they wouldn’t have done before.

This is because of what’s known as “fiscal drag” – where thresholds remain the same rather than being increased with inflation, therefore dragging more people into the tax band.

The inheritance tax threshold has been frozen at the same rate it has been set at since 2009. On the surface this might sound inconsequential, but Nicola disagrees.

“It does affect people quite significantly. The inheritance tax threshold is currently £325,000 – had it gone up in line with inflation, it would be over £465,000 by now. So anyone who's got an estate valued between £325,000 and £465,000 is now caught by inheritance tax where perhaps they wouldn't have been before,” she said.

No changes were announced in respect of headline rates of capital gains tax. However, the annual exempt amount of £12,300 is being reduced to £6,000 from April 2023 and to £3,000 from April 2024.

“This lack of increase in personal allowances for the next five years will have a drip-drip effect on everybody,” said David Fort, Partner at Haines Watts Manchester.

“We've had some quite good capital allowances, which has helped people to invest. They're dropping off now, which is a bit of a concern for a longer term strategy.”

In September 2022’s infamous Mini Budget, it was announced that no stamp duty needs to be paid on properties with a value up to £250,000. This was to help encourage housing market sales, but Ian points out that capital gains tax also plays a part here.

“The fact that capital gains tax rates haven't altered but the allowances have gone down may be a deterrent to people wanting to sell. We could also see an influx of people trying to sell before April next year when the allowance drops. It's not a huge amount but it could be something people take into account,” he said.

Personal tax thresholds within income tax and National Insurance contributions (NICs) will remain frozen until April 2028 – while salaries continue to rise with inflation. 

Again this means more individuals are brought within the tax and NIC net, and others will fall into the higher tax thresholds.

The pension triple lock has been kept, which goes against the general rule of not increasing thresholds in line with inflation. 

“This was obviously an important manifesto promise, which I feel they couldn't do away with,” noted Nicola.

But, she warns that pensioners still need to be mindful of their situation:

“I think retired people might have an issue. Their state pension is going up with inflation, but their personal allowance is staying the same, so more and more pensioners will get caught in the net.”

Getting advice on how to cope with the Budget changes

It’s likely that most people will end up paying a bit more in the long-run, so talk to a specialist about what can be done to help reduce the pain. We're here to help. Please get in touch with our team who are on hand to answer your questions and help you navigate the changes with confidence.