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In November 2022, the Chancellor released his Autumn Statement – announcing a range of tax changes that would start coming into effect in April 2023. With 2 months to go until the end of the 2022-23 tax year, at the time of writing, it is vital to ensure you are maximising allowances before the deadline. Doing so could unlock significant tax savings, both now and in the future. Below, we explain some key changes set to arrive on 6 April 2023, how they could affect you and ways to prepare your financial plan. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Which tax changes are arriving on 6 April 2023?
Firstly, investments will be taxed more heavily from 2023-24 (starting on 6 April 2023). In the Autumn Statement, Chancellor Hunt announced that the tax-free capital gains tax allowance (the Annual Exempt Amount) will go down from £12,300 to £6,000 in April 2023, with a further reduction to £3,000 in 2024. Dividends were also targeted. Currently, investors can earn up to £2,000 in dividends each year without tax. Yet from 6 April 2023, this tax-free allowance will go down to £1,000 and then down to £500 in 2024. Moreover, Chancellor Hunt cancelled the plan to reduce dividend tax by 1.25% in April 2023. Instead, the current rates of 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate) will stay in place.
Another key change is the planned reduction of the additional rate threshold for income tax. In April 2023, the 45% rate will be payable on income starting at £125,140 (not from £150,000, as at present). Corporation tax will also increase from 19% to 25% on profits exceeding £50,000. More positively, however, the stamp duty tax changes announced by former Chancellor Kwasi Kwarteng (in September 2022) will remain in place until 31 March 2025. This means that first-time buyers will not need to pay stamp duty on the value of a property up to £425,000 (formerly £300,000). For existing homeowners, the threshold will remain at £250,000 (up from £125,000).
Key tax freezes to know about
Apart from the additional rate threshold change, other income tax bands will remain in place for taxpayers in England and Wales until 2027-28. The tax-free Personal Allowance will also stay at £12,570. This, in effect, will result in a “stealth tax” on many taxpayers, potentially pushing 1.2m taxpayers over the 40% threshold by 2026 (due to pay rises). The inheritance tax threshold will also stay at £325,000 until April 2028, and has not been changed since 2010-11. The residence nil rate band will also remain at £175,000. This means that more estates will be liable to pay IHT as property values (and other prices) rise over the coming years. No further changes are set to come for National Insurance.
Implications for financial planning
How should you act, in light of the above? You should seek financial advice before making any big changes to your financial plan. However, some general ideas can be found below. Firstly, if your earnings are nearing a higher threshold – i.e. £50,271 (the higher rate) or the additional rate (£125,140 from 6 April 2023) – then be mindful that future pay rises could drag you over the threshold in the coming years. By planning now, you could limit the impact on your finances. For instance, some individuals may benefit from negotiating a “salary sacrifice” agreement with their employer. Here, you could agree that, instead of future pay rises, the organisation increases its employer contribution to your pension. This can result in less tax for everyone – including your organisation, which does not need to pay National Insurance on its contributions and can also treat these as a taxable expense (potentially reducing corporation tax).
In light of imminent reductions to tax-free allowances, a taxpayer should consider maximising his/her £20,000 annual ISA allowance (where interest, capital gains and dividends are earned without tax). This could help to side-step future taxes on gains and dividends which exceed the lower tax-free allowances from 6 April 2024. You may wish to seek advice about which assets are best to place into your ISA(s). For instance, the tax rate on a property sale (e.g. a buy to let) is 18% and 28%, respectively, for the basic and higher rate. The rates on other asset sales, by contrast, are 10% and 20%.
Bonds issued by the UK government (gilts) are exempt from capital gains tax. For a basic rate taxpayer, your dividend tax rate (8.75%) is lower than the 10% and 20% levied on chargeable asset disposals (for capital gains). Therefore, it could make sense for some investors to focus their ISA allowance on “growth” shares rather than dividend-paying shares. For a higher rate taxpayer, the dividend tax rate (33.75%) is higher than the 18% and 28% rates due on capital gains. Therefore, here it could be wiser to focus your ISA(s) on building your dividend-paying investments, depending on your asset base and long-term strategy.
This complex UK tax landscape means that investors need to structure their assets prudently and seek financial advice to effectively mitigate needless tax exposure.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk