Last year, chancellor Jeremy Hunt made some key announcements during the autumn statement that could affect how much tax you pay from April. Reviewing your financial plan could help you understand if you’ll be affected and make changes if necessary.
In sharp contrast to the mini-Budget delivered by former chancellor Kwasi Kwarteng in September, Hunt’s statement, delivered just two months later, increased taxes. As a result, you may find that you need to update your existing financial plan or that the amount of tax you pay increases.
The new tax year starts on 6 April 2023 and there are three changes to thresholds and allowances you should keep in mind when reviewing your tax liability.
1. Additional-rate Income Tax threshold
Your Income Tax liability may increase for the 2023/24 tax year because the threshold for paying the additional rate of tax has been lowered.
From April, the 45% rate will now apply for earnings above £125,140, this compares to the previous threshold of £150,000. The tax rates for the 2023/24 tax year are:
- Personal Allowance: 0% (up to £12,570) but reduced if income is over £100,000
- Basic rate: 20% (£12,571 to £50,270)
- Higher rate: 40% (50,271 to £125,140)
- Additional rate: 45% (more than £125,140)
Income Tax rates and thresholds have also been frozen until 2028.
The combination of these two factors means that 4 million more people are expected to pay a higher rate of Income Tax than they are currently, according to a Telegraph report. It’s estimated that the number of taxpayers paying the higher- or additional-rate of Income Tax will double to 8 million.
How much you’ll be affected by this change will depend on your income. The lowering of the additional rate threshold means that if you earn £150,000, you will pay just over £1,200 more in tax each year.
Being aware of the changes ahead of the tax year means you can adjust your budget if needed and there may be steps you can take to lower your tax liability.
2. Dividend Allowance
The Dividend Allowance will halve in each of the next two years. It could affect you if you’re an investor or business owner.
As an investor, you may receive dividend payments from companies or funds you invest in. Dividend-paying companies are usually well-established businesses that have stable earnings. How much you receive through dividends is often linked to performance and stock prices.
As a business owner, you may choose to pay dividends to yourself to boost your income in a tax-efficient way.
In April the amount you can receive in dividends before tax is due will fall from £2,000 to £1,000. It will then halve again to £500 in April 2024.
How much tax you pay on dividends that exceed the allowance depends on the Income Tax band(s) that the dividend income falls into when added on top of your other income.
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
So, if the Income Tax changes mean you’re now an additional-rate taxpayer, you could find your tax liability increases more than you expect if you receive dividends.
If dividends form part of your income, you should review how your tax bill will change in the upcoming tax year. Taking dividends may no longer be as tax-efficient as it once was, and may not be right for you anymore.
3. Capital Gains Tax annual exempt amount
The Capital Gains Tax (CGT) annual exempt amount represents how much profit you can make each tax year before CGT is due. The annual exempt amount will also fall significantly over the next two years.
CGT is paid when you make a profit when you sell or dispose of certain assets, including investments that aren’t held in an ISA, second properties, and personal possessions worth more than £6,000, excluding your car.
In the 2022/23 tax year, the annual exempt amount is £12,300. It will fall to £6,000 in April 2023, and then to £3,000 in April 2024.
The rate of CGT depends on the tax band(s) the taxable gain falls into when added on top of your taxable income, but it can substantially reduce the profit you make.
- Standard CGT rate (gains, or parts of gains, falling below the higher rate band): 18% on residential property, 10% on other assets
- Higher CGT rate (gains, or parts of gains, falling above the basic rate band): 28% on residential property, 20% on other assets.
If you plan to dispose of assets, it could make sense to do so before the annual exempt amount falls. For long-term plans, you should be aware of how the changes could affect your wealth.
Could the changes affect you?
If the changes could affect your financial plan or you have questions about what they mean for you, please get in touch. We’re here to help you create a plan that suits your needs and reflects current legislation to help you get the most out of your money.
Please note: This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
