As the end of the tax year approaches, AJ Bell experts Laura Suter and Tom Selby take a look at some of the key changes to be aware of, and how you can prepare for the new tax year:
- Additional rate threshold lowered to £125,140
- Personal Allowance and higher rate income tax threshold freeze
- CGT allowance cut from £12,300 to £6,000
- Dividend allowance cut from £2,000 to £1,000
- Minimum wage increases by 9.7% (from April 1)
- Council Tax increases
- £67 a month energy bill grant discount ends
- Child benefit
- State pension increases in line with September inflation (10.1%)
- Pension lifetime allowance charge removed
- Pension annual allowance increases from £40,000 to £60,000
- Money purchase annual allowance (MPAA) increases from £4,000 to £10,000
- Tapered annual allowance increases to £10,000
Laura Suter, head of personal finance at AJ Bell, comments:
“April 6 is a key date in the financial calendar, with a number of different tax changes coming in that will both help and hinder households, depending on their circumstances.
“For workers, a combination of frozen tax brackets and wage inflation, which currently stands at 5.7%*, means the Treasury will take a growing share of your income. For those worried about energy bills, although the Energy Price Guarantee has been extended, they’ll stop receiving the £66 monthly discount off their direct debit as the government’s winter subsidy scheme ends.
“Elsewhere, investors face a tax raid in the form of drastically reduced capital gains tax and dividend allowance limits.
“The big winners are wealthier pension savers, who will enjoy a 50% increase to the annual allowance as well as an end to penalties on pension investment growth as lifetime allowance charges are scrapped.
“Anyone who finds themselves drowning their sorrows over the state of their finances will hope that pubs pass on the new higher rate of draught relief in the form of cheaper pints.”
*ONS: Earnings and working hours
Laura on the additional rate threshold and income tax band freezes
“From April those earning more than £125,140 will face a higher tax bill thanks to Chancellor Jeremy Hunt. The rate at which the 45% rate of income tax kicks in will be lowered from the current £150,000 down to £125,140. The move means that someone earning £150,000 a year will pay almost £1,250 a year extra in tax – putting an extra 2% on their total tax bill.
“On top of this all taxpayers are seeing a deep freeze on their income tax bands, meaning that more will be pushed into the next tax bracket. The amount you can earn within each income tax band would normally increase with inflation at the start of each tax year, but the government has frozen them until 2028. It means that anyone who gets a payrise could be hit with a higher tax rate, as well as potentially losing certain allowances, such as child benefit or their personal allowance.
“Thresholds like the ‘high income’ child benefit charge, which sees parents gradually lose child benefit when one parent earns between £50,000-£60,000, are also frozen, contributing to the fiscal drag effect. Putting money into pensions, or using other salary sacrifice plans, is one way to help keep tax bills down and retain allowances, but for some that’s not financially viable.”
|
Salary at start of 2021/22 tax year |
Total tax due with frozen allowances (from 2022/23 to 2027/28) |
Total tax due with inflation-linked allowances (from 2022/23 to 2027/28) |
Difference |
|
|
£33,000 |
£27,378 |
£24,821 |
£2,557 |
10% |
|
£50,000 |
£53,265 |
£46,695 |
£6,570 |
14% |
|
£75,000 |
£117,602 |
£104,818 |
£12,783 |
12% |
On beating the CGT and dividend allowance cuts, Laura says:
“From April the tax-free allowance on dividend income will be halved to just £1,000. That is set to cost investors and company directors up to £337.50 if they’re a higher rate taxpayer, or nearly £400 if their income takes them into the 45p tax band, the threshold for which is being cut to £125,140.
“Likewise, government will cut the amount that investors can take as tax-free gains on investments. At present investors can chalk-up a £12,300 gain without paying any tax. From April that falls to just £6,000, meaning the CGT bill on an investment gain could be £1,200 higher next year.
“Thankfully, there is a route around this if you’re able to put investments into your ISA or pension instead, where dividends and gains are tax free. Anyone can put up to £20,000 a year into an ISA and most people have a £40,000 annual limit on the amount they can pay into their pension with the benefit of tax relief – set to be increased to £60,000 in April – and can ‘carry forward’ any unused allowances from the previous three tax years, as long as they don’t pay in more than they earn in a single year.
“Make the most of these allowances to shield money from the taxman and look into ‘Bed and ISA’ transactions to make use of your CGT allowance.
“By using a ‘Bed and ISA’ service, you can realise gains up to the current CGT allowance and instantly buy them back in your ISA. This ensures you take maximum advantage of the current £12,300 tax-free limit and shelter those investments from any future tax liability by putting them in an ISA. If your gains are higher than your allowance, you could transfer assets to your spouse so they can use their CGT and ISA allowances.
“From April next year the dividend tax and CGT exempt allowances will be cut again, to just £500 and £3,000 respectively, so start planning now if this is going to land you with a big tax bill.”
On the increase to minimum wage, Laura says:
“April will bring good news for those on the lowest pay, as the minimum wage will increase by 9.7%, giving a payrise of £1,677 for someone who is full time on the minimum wage*.
“The rates of minimum wage vary depending on your age and whether you’re an apprentice, but for those over the age of 23 it will increase from £9.50 an hour now to £10.42 an hour from April. For 18-20 year-olds the rate will rise from £6.83 to £7.49.”
*Adult age over 23 working a 35-hour week
- Council Tax
On increases of up to 5%, Laura says:
“Chancellor Jeremy Hunt cut the red tape for councils in last year’s Autumn Statement, making it easier for them to bring in bumper increases to council tax bills. The move means that councils can increase bills by 5% without having to have a referendum, where previously they were limited to an increase of just 2%.
“The exact increase you’ll see depends on your local council and what band your property falls into, but many local authorities are raising council tax up to the 5% limit. It means the average Band D property in the UK will pay £2,064 a year for council tax – an increase of almost £100 on 2022’s bills.”
Laura says:
“Although the Energy Price Guarantee has been renewed from April for another three months, the government’s other scheme comes to an end, removing part of the subsidy on household energy bills.
“The £400 discounts on bills the government dished out this winter will end in April. The scheme has been in place since October and although the way it is paid differs among providers, it amounts to households losing out on around £67 a month.
“For those on prepayment meters, plans to bring charges in line with other customers will not kick-in until July, meaning they have another three months until they can expect a cut in energy costs.
“At the same time, the Cost of Living support payments for those on certain benefits will continue, but at a reduced level. It means that people will get £600 before the end of the year, rather than the £650 they got in 2022.”
Laura says:
“Child benefit is one of the many state benefits that will increase by 10.1% this April, as the government raised rates by inflation. It means that the weekly rate for the eldest child will rise from £21.80 to £24 while the rate for other children will increase from £14.45 to £15.90 a week.
“This increase means that a parent of two children will get £189.80 a year more in benefit in 2023/24.”
On increases to the state pension and benefits increase, AJ Bell head of retirement policy Tom Selby says:
“With inflation ripping through household budgets, pensioners and those in receipt of working-age benefits will at least enjoy a bumper boost to their incomes this year.
“For 2023 pensions and benefits will be uprated by 10.1%, in line the September 2022 CPI figure. The full flat-rate state pension, paid to those reaching state pension age from 6 April 2016, will increase from £185.15 per week to £203.85 per week (£10,600.20 per year) from April 2023 and over £10,000 a year for the first time. The basic state pension, paid to those who reached state pension age before 6 April 2016, will increase to over £8,000 a year.
“Although it looks like this government will stick with the ‘triple-lock’ state pension promise for the rest of this Parliament, it remains unclear how the main political parties will address the question of state pension increases over the longer-term ahead of the next election.
“Ditching the triple-lock would undoubtedly be controversial, but it also has to happen at some point – otherwise the state pension will increase in real terms indefinitely.”
Tom on the pensions changes coming in April:
“The amount you can save in a pension each year has been eroded from a high of £255,000 in 2010/11 to £40,000 today, although Jeremy Hunt reversed the trend last week by announcing that this would increase to £60,000 from April 6.
“Pensions ‘carry forward’ rules allow you to use unused allowances from up to the three prior tax years in the current tax year, provided you were a member of a pension scheme in the tax year you are carrying forward from and you don’t exceed 100% of your annual earnings. In theory, it means someone could pay in as much as £180,000 to their pension next year.
“Carry forward can be particularly useful for business owners or anyone who is trying to make up for lost time saving for retirement.
“Crucially, the lifetime allowance (LTA) tax charge will reduce to 0% from April, ahead of the LTA being abolished altogether through future legislation. As part of that reform, the maximum tax-free cash people can build up will be capped at £268,275.
“In doing so, the Chancellor has increased by 50% the amount you can pay into your pension each year at the same time as removing the spectre of a possible future penalty if you enjoy strong investment growth. The fear of breaching the LTA will have discouraged some people from adding to their pension or taking investment risks in line with their long-term retirement strategy, so scrapping the LTA should now give people the confidence to supercharge their retirement savings.
“In the short-term, it is crucial anyone at risk of breaching their LTA through a ‘benefit crystallisation event’ – such as taking tax-free cash, entering drawdown or buying an annuity – waits until 6 April to do this if they possibly can. This is because they could still face an LTA charge before 6 April, whereas from 6 April onwards there will be no LTA charge.
“In addition, anyone who has a form of lifetime allowance ‘protection’ needs to be extra careful not to breach the terms of that protection before 6 April, particularly where it entitles them to a higher tax-free cash entitlement. For those with a tax-free cash entitlement higher than £268,275, from 6 April they will be able to continue contributing to their pension while retaining the higher entitlement.”
“The money purchase annual allowance applies to anyone who has ‘flexibly accessed’ taxable income from their DC pension. Once triggered, it reduces your annual allowance and removes the ability to ‘carry forward’ unused annual allowances from the three previous tax years.
“Previously, the MPAA was set at £4,000. However, from the start of the new tax year it will once again return to £10,000, the level at which it was first set.
“The term ‘flexibly access’ mainly refers to taking income via drawdown, where your pension is invested and you take an income to suit your needs, or ad-hoc lump sums direct from your DC pot. Taking an income in DB or buying a lifetime annuity won’t trigger the MPAA.
“If you breach your annual allowance, you will face an annual allowance charge designed to remove the upfront tax relief your contribution would have received.
“Broadly, that means a basic-rate taxpayer would pay a 20% charge, a higher-rate taxpayer 40% and an additional-rate taxpayer 45%.”
“The tapered annual allowance is currently triggered by higher-earners with ‘threshold’ income above £200,000 and ‘adjusted’ income above £240,000.
“For every £2 of adjusted income above £240,000, the annual allowance of high-income savers reduces by £1, to a minimum of £4,000 for those with adjusted income of £312,000 or more.
“From April that ‘adjusted income’ threshold will rise to £260,000 and the minimum tapered annual allowance will increase to £10,000. This should mean fewer high earners are caught by the taper and the impact should be lower.”