Many people are aware of tax allowances in general, however as we come to the change in tax year you should be aware of the changes that will shortly come into effect. These changes may have an impact on choices you make in the next few weeks, months, or even years.
In a volatile and high inflation economy, with average incomes, rents and interest rates rising, together with the impact of the Treasury freezing most tax allowances at their 2022/23 levels (although some are being reduced), you may find that increases in your income push you into higher rates of tax than you are used to paying or that ultimately you may see your tax liability increase.
To understand how these changes may affect your tax position here are the thresholds and rates to be aware of:
- The personal allowance remains set at £12,570, with the higher rate threshold at £50,270. The tax-free personal allowance begins to be restricted by £1 for every £2 that you earn over £100,000 and from 6 April 2023 the additional rate tax band has been reduced to £125,140, down from £150,000. This means that when your income exceeds £125,450 you will pay tax on every penny you earn. This does remove the confusing stepping of effective tax rates for higher earners, however brings more individuals into the highest rates of tax earlier.
- Scottish taxpayers will also see their tax rates increased in the higher and top rate tax bands, moving from 41% and 46% to 42% and 47% respectively. The higher rate tax band also falls in line with the restriction to the higher tax band in England, Wales and Northern Ireland, meaning that taxpayers begin to pay the top rate from £125,140.
- The changes in the tax bands and freezing of the thresholds has implications for allowances too. If your income is within the basic tax band, you will not pay tax on first £1,000 of interest income, however this is restricted to £500 for those with income that exceeds the higher rate threshold and is restricted entirely to nil in the additional rate tax band. With more people likely to tip into these higher bands, and interest rates rising, it is worth keeping this in mind.
- If you or a partner receive child benefit, this begins to be clawed back once one of you in the household earns in excess of £50,000. Crucially, this does not need to be the same person’s income as the person who is in receipt of the child benefit.
- Rents are expected to rise in excess of inflation over the next year, with finance charges – often one of the largest expenses for landlords – no longer a directly allowable expense against rental profits on the majority of properties. This means that the rental profits included in your total income will be calculated without considering mortgage interest as an expense, and may be significantly higher than in previous years with rent increases and the change in the mortgage interest treatment. You still receive the mortgage interest as a 20% tax credit, being tax neutral for basic rate taxpayers, however this method of calculation may push income levels into a higher tax bracket, with knock-on impacts as a result.
There are ways that you could make your income work for you:
- In order to extend tax bands that you do have available, you may consider making gift aid contributions or pension contributions. Each threshold will be increased by the gross amount contributed, extending the amount you pay 20% (or 8.75%) on, whilst having the additional benefit of funding charity close to your heart or your future retirement.
- If you are a higher rate taxpayer you can claim relief against your taxable income for any personal pension contributions up to a maximum of £40,000 (unless your Net Relevant Earnings are lower) for any tax year, subject to levels of income and any tapered amounts. When considering how much to contribute, you should check your Pension Input Periods and whether there are any unused allowances from previous years. You should be aware, when making large contributions, it can be important to consider how these fit in with the income you receive and the contributions that you have already made, as contributing too much may give rise to tax charges. You may have the benefit of any unused allowances from the prior three tax years, but taking advice will ensure that you contribute the right amount for you.
- Another option is if you have been offered a company car, you may consider going electric. The rules regarding the calculation of benefits on electric cars remain significantly enhanced to make the purchase and use of electric cars more attractive. For full battery electric vehicles (BEVs) the P11D rate for 2022/23 is 2% and frozen until 5 April 2025. These rates will also apply to cars with CO2 emissions under 50g/km provided they have an electric range of over 130 miles.
Whilst some allowances such as the personal allowance have been frozen, others are being reduced from the next tax year:
- The capital gains annual exempt amount for individuals of £12,300 will be reduced to £6,000 from 6 April 2023, and then to £3,000 from 6 April 2024, giving you the ability to plan disposals in order to utilise these tax-free amounts, with similar effective cuts for trusts. As this is a significant reduction for many, you may wish to consider asset ownership in order to benefit from two annual exempt amounts upon the ultimate disposal of an asset.
- In addition, the dividend allowance reduces to £1,000 from 6 April 2023 and then again to £500 from 6 April 2024, and so future dividends voted will become taxable sooner. These remain taxable at 8.75%, 33.75%, and 39.35%, and so whilst they are taxed at lower rates than other types of income they did not benefit from the removal of the Health and Social Care Levy in the same way that earned income did. If commercially viable, it may worth considering a dividend payment to before 6 April 2023. This could be to utilise the £2,000 tax-free dividend allowance if you have not yet taken dividends or to take advantage of the lower tax rate that dividends are subject to.
The above is by no means exhaustive, and it is worth noting that the Chancellor is due to make announcements in the Spring Budget on 15 March, therefore there may be further changes still to come. By engaging a tax accountant to assist with tax and remuneration planning you can ensure that your sources of income work for you. We have a wealth of knowledge when considering reliefs at your disposal and reaching your ideal outcome as tax efficiently as possible. If you would like assistance, or have any queries, please do not hesitate to contact us.
Adam Smith is a Personal Tax Accountant – if you would like to have a chat about to how to make the best use of your tax allowances, please contact Adam or a member of the Tax team on 01242 776000 or tax@randall-payne.co.uk.
