It is critical to be aware of the tax changes being introduced from April 2023, so people can plan their personal finances for the months ahead. Experts at taxassist have summarised the key changes that Britons should be aware of.
Increased income tax for higher earners
The income tax additional rate threshold (ART) is set to reduce from £150,000 to £125,140 from April 6, 2023. This means more taxpayers will pay income tax at the higher rate of 45 percent once their income goes above £125,140. The new threshold will apply to taxpayers in England, Wales, and Northern Ireland.
Tax tip – consider tax-efficient pension saving
Higher-rate taxpayers face two tax traps from April 2023:
Where income exceeds £125,140, they pay the additional rate of income tax, which is 45 percent (47 percent in Scotland).
Also, where their income is between £100,000 and £125,140, they are subject to an effective tax rate of around 60 percent.
This is because, after their income exceeds £100,000, their personal allowance is reduced by £1 for every £2 they go over the £100,000 tax bracket.
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People may be able to reduce their tax exposure by making personal pension contributions and charitable donations.
For a basic rate taxpayer who wants to save £100 into their personal pension plan, the effective cost is only £80.
For a higher-rate taxpayer, saving £100 could effectively cost as little as £60 (£58 in Scotland). The cost drops down further to only £55 (£53 in Scotland) for an additional rate taxpayer.
While potentially extremely tax efficient, Britons are warned that there are “several pitfalls which you should consider” before taking action.
Importantly, the amount that may be saved into a personal pension is limited, so people should review their position before taking action.
Frozen tax rates
The freezing of many tax allowances until 2028 means that taxpayers on modest incomes will also pay more tax as inflation bites.
The income tax personal allowance of £12,570 is frozen until 2028 and this will impact basic rate taxpayers as more income effectively becomes subject to tax.
Tax tip – can transferring assets improve one’s tax position?
On their website, it explains it is possible to gift some or all of any income-producing assets someone owns to their spouse or civil partner and save tax.
Generally, for this to work, their gift must be to a spouse or civil partner from whom they have not separated and be an unconditional gift.
Professional advice should always be taken, so individual circumstances can be reviewed before taking action.
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Basic rate taxpayers may also be able to transfer £1,260 of their unused personal allowance to their spouse or civil partner to save tax.
This only applies where neither of them is a higher-rate taxpayer.
Reduced Capital Gains Tax annual exempt amount
From April 2023, the Capital Gains Tax (CGT) exemption most individuals can claim will reduce from £12,300 to £6,000 and again to just £3,000 from April 2024.
For anyone selling assets liable to CGT, they need to factor in the additional tax which may arise from the reduction in the allowance.
Tax tip – make use of tax-efficient investment options
Where people hold eligible investments outside of an ISA, they may have to pay CGT on any gains they make over the allowance.
They state: “Now is a good time to consider making future savings within an ISA and potentially switching some investments into an ISA.
“Shifting investments into an ISA can count as a taxable event for CGT purposes, so you should review your situation before taking action.
“You should consider the need to take investment advice from a registered financial adviser and we work closely with TaxAssist Financial Services who can offer independent investment advice and a full range of services for your financial planning needs.”
Frozen inheritance tax thresholds
The inheritance tax (IHT) nil-rate band of £325,000 will be frozen until April 2028.
In addition, the residence nil-rate band will also be frozen at £175,000. The residence nil-rate band taper will be frozen at £2million.
Tax tip – consider an IHT review
According to HMRC, IHT receipts for April 2022 to January 2023 were £5.9billion, which is £0.9billion higher than in the same period a year earlier.
The nil-rate band freeze, coupled with rising house prices has caused more IHT to go to HMRC and for estates which may become liable to pay IHT, there are several steps which can be taken to reduce tax exposure.
For individuals whose estate will fall into the IHT net, the main point is to act sooner rather than later and consider taking specialist advice.