Tax Year End - Preparing for 5 April 2023
As we approach the end of what has been an eventful 2022/23 tax year, we take a look back at the changes introduced by Jeremy Hunt in his Autumn Statement and provide some hints and tips on how you can grow and protect your wealth ahead of the 5 April and new 2023/24 tax year.
Key changes introduced:
Income Tax
The personal allowance along with the basic and higher rate tax thresholds remain frozen until 2028. Whilst this is not necessarily a tax hike, with salaries on the rise this freeze will push many into the 40% tax band.
Also announced was a change to the additional rate threshold. This will decrease from £150,000 to £125,140 from April 2023. High earners will really feel the hit here, with a greater proportion of their income subject to the 45% tax rate.
Both the above changes will apply to England and Northern Ireland, with Wales also adopting these changes from April 2023.
In Scotland, the top rate threshold will fall to £125,140 from April 2023, with higher and top rate tax increasing by 1% to 42% and 47% respectively. The Personal Allowance and other tax thresholds remain the same.
Income tax rates for England, Wales, and Northern Ireland
| Band | Tax rate | Taxable income 2022/23 | Taxable income 2023/24 |
| Personal Allowance | 0% | Up to £12,570 | Up to £12,570 |
| Basic rate | 20% | £12,571 to £50,270 | £12,571 to £50,270 |
| Higher rate | 40% | £50,271 to £150,000 | £50,271 to £125,140 |
| Additional rate | 45% | over £150,000 | Over £125,140 |
Income tax rates for Scotland
| Band | Tax rate 2022/23 | Taxable income 2022/23 | Tax rate 2023/24 | Taxable income 2023/24 |
| Personal Allowance | 0% | Up to £12,570 | 0% | Up to £12,570 |
| Starter rate | 19% | £12,571 to £14,732 | 19% | £12,571 to £14,732 |
| Basic rate | 20% | £14,733 to £25,688 | 20% | £14,733 to £25,688 |
| Intermediate rate | 21% | £25,689 to £43,662 | 21% | £25,689 to £43,662 |
| Higher rate | 41% | £43,663 to £150,000 | 42% | £43,663 to £125,140 |
| Top rate | 46% | Over £150,000 | 47% | Over £125,140 |
How to minimise the impact of these changes
- Tax planning is even more critical as a result of these changes. If salary sacrifice is an option through your employer, consider using it to reduce your taxable earnings or think about increasing your pension contributions. Benefits like a season ticket loan, company car, cycle-to-work scheme or claiming tax-free childcare can also be used cut your taxable earnings.
- For those pushed into additional rate tax from April 2023, it may be worth deferring pension contributions to benefit from a higher rate of tax relief.
- Personal pension contributions are restricted by earnings, but up to £3,600 gross can be paid annually regardless (at a net cost of £2,880) up to age 75. Given the tax efficiency of pensions, this could help further offset the impact of the reduction in Capital Gains Tax (CGT) and dividend allowances being reduced in April 2023.
- You can read more on pension planning here.
Dividend Tax
Even those making modest returns on their investments will now face a bigger tax hit, as the dividend tax threshold drops from £2,000 to £1,000 from April 2023. This change will also force small portfolio investors into filling self-assessment tax returns, adding to the compliance burden for many.
Dividend Tax Rates will remain the same (at 8.75%, 33.75% and 39.35% for basic, higher, and additional rate taxpayers respectively).
What can you do?
- The reduction of CGT and halving of the dividend allowance mean unwrapped investments, including General Investment Accounts, are even less attractive and so therefore you may consider investment bonds.
Capital Gains Tax (CGT)
The Capital Gains Tax annual exemption allows for those who make modest gains on investments to do so without losing any of the growth realised to tax.
The announcement of a gradual reduction in this allowance from £12,300 to £6,000 and then to £3,000 will mean that even the most modest of gains could become taxable increasing the tax administration for many through self-assessment filing.
Those with much more sizable investment portfolios, and existing business owners, will also be affected but the marginal impact will be more keenly felt by those with smaller investment portfolios.
How to minimise the impact of these changes
- Aim to realise gains in unwrapped investment portfolios to make use of the CGT allowance before it is reduced in April and consider realising losses which can be used to offset gains in future tax years.
- As always, it is important to ensure investments are structured in the most tax-efficient way by making use of ISA allowances annually.
- Consideration should be given to holding investments jointly (i.e. with spouses/civil partners) so that gains can be offset against two CGT exemptions.
Inheritance Tax (IHT)
The stealth raid on estates continues with the nil-rate band now frozen until 2028. Disregarding the significant rises in house prices and other assets, the threshold will have been left on ice for nearly two decades. It has and will continue to hit, millions of unsuspecting families who never expected to face an IHT bill.
The standard Nil Rate Band (NRB) is £325,000, and the Residence Nil Rate Band (RNRB) is £175,000 (per individual). The RNRB becomes tapered for estates which exceed £2m (by £1 for every £2 above this limit).
What can you do?
- IHT receipts as a percentage of GDP are already at an all-time high and even the overdue cool-down in the housing market is unlikely to change the course for some time. This means IHT planning is essential for families.
- Putting a will in place, placing assets in a trust, making use of gifting allowances including the £3,000 annual gifting exemption, but also considering larger gifting where this is affordable can help to limit IHT exposure and can be done now.
- Gifting is especially relevant given the tapering of the RNRB. Broadly speaking, gifts (which are not exempt) remain inside an estate for seven years, but outright gifts immediately reduce the value of an estate for RNRB purposes, potentially providing significant IHT savings.
- You can find more tips on IHT planning here.
National Insurance Contributions (NICs)
The only survivor from the initial mini-budget announcement, the Health and Social Care Levy (a 1.25% increase to NIC rates, which was aimed at meeting some of the costs of the economic response to COVID-19) was abolished with effect from 6 November 2022.
This originally came into force in April 2022. As a result, with effect from 6 November 2022, the temporary 1.25 percentage point increase in National Insurance rates was reversed for the rest of the financial year. since then, the NIC Primary Threshold (when employees begin paying NICs) increased to £12,570.
No further changes were announced, meaning employees will continue to pay 12% between £12,570 and £50,270, and 2% above this.
Corporation Tax
As previously planned, Corporation Tax will increase to 25% from April 2023 for companies with profits over £250,000. For companies with profits of £50,000 or less, the rate will remain at 19%, with a transitional rate for companies in between this.
Year End Tax Planning
Whilst it’s not the most exciting of tasks, year end tax planning can help you save thousands of pounds each year.
We have prepared a short guide with a more detailed overview of the allowances and reliefs available to you.
Get in touch
You should, of course, obtain tax and financial advice based on your individual circumstances before taking any actions to ensure they fit into your wider financial plans.
Please get in touch if you would like to speak with an adviser.
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