Tony Wickenden: Advisers to benefit from soaring taxpayer numbers

Understandably, the main focus for our sector following the Budget earlier this month was on the changes to pensions tax.

I will make no comment on the fundamental question of whether the changes will deliver the required result of both driving people back to work or keeping them working… Aside from that, the details are eagerly awaited.

Among all the pensions-related excitement (I still find “pensions” and “excitement” an interesting juxtaposition), it would be easy to forget the tax context in which we are all living and its impact on the numbers of people likely to need financial advice.

The many frozen thresholds, allowances and exemptions remain as such and will continue to have a big impact.

The greater the “tax pain” the greater the desire to seek some relief from it

It is unlikely a Labour government (should we get one) would see “thawing” these as a major priority, at least in relation to higher and additional rate thresholds, the dividend allowance, the capital gains tax exemption and the inheritance tax thresholds.

Advisers should take heart from this, as the market for those requiring advice is likely to materially increase.

It has almost become a tradition for the Office for Budget Responsibility (OBR) to rework its calculations on the impact of the freezes to the personal allowance and higher rate threshold in its economic and fiscal outlook (EFO).

In the March 2021 EFO, which accompanied then-chancellor Rishi Sunak’s original announcement of a freeze on the personal allowance and higher rate threshold through to 2025/26, the OBR estimated that, by 2025/26, the net effect would be:

• Extra revenue of £8bn a year
• 3 million more taxpayers than if the personal allowance had been indexed
• 1 million more higher rate taxpayers than if the higher rate threshold had been indexed.

A year later, inflation prompted the OBR to revise its 2025/26 figures to:

• Extra revenue of £17.5bn a year
• 8 million more taxpayers than if the personal allowance had been indexed
• 2 million more higher rate taxpayers than if the higher rate threshold had been indexed.

In the latest EFO, which emerged with the Budget earlier this month, the OBR has once again revisited its spreadsheets, this time also taking account of the reduction of additional rate threshold to £125,140 for 2023/24 and last November’s announcement of a further two years’ freeze. It now reckons that by 2025/26:

• Extra revenue of £24.2bn a year
• 2 million more taxpayers than if the personal allowance had been indexed
• 2 million more higher rate taxpayers than if the higher rate threshold had been indexed.
• 300,000 more additional rate taxpayers than if the £150,000 threshold had remained.

Taking the view out to 2027/28 gives the following:

• Extra revenue of £26.4bn a year
• 2 million more taxpayers than if the personal allowance had been indexed
• 1 million more higher rate taxpayers than if the higher rate threshold had been indexed
• 400,000 more additional rate taxpayers than if the £150,000 threshold had remained.

The EFO projections also show that, by 2027/28, 20.4% of taxpayers will be paying more than basic rate compared to 14.5% in 2021/22 (and 10.4% in 2010/11 when additional rate tax was introduced).

The latest EFO figures naturally use the OBR March 2023 assumptions for inflation, which are that CPI increases will average less than 1% a year in three years starting in 2024. The OBR notes its 2024 Q4 CPI forecast of 0.5% is 1.9% below the current independent consensus.

If the OBR proves to be too optimistic on inflation, that will bump up the taxpayer numbers yet again.

The greater the “tax pain” the greater the desire to seek some relief from it, and therein lies the adviser opportunity.

Tony Wickenden is managing director of Technical Connection