In this article, we look at what changes are afoot in the forthcoming 23/24 tax year and identify ways that you can minimise the tax on your income. We also look at ways that you can maximise your savings before the end of the current tax year.
A review of planning possibilities
Firstly, the key points to note are:
- – The personal allowance (PA) is frozen at £12,570 until 5 April 2028 across the UK
- – The basic rate band is frozen at £37,700 for the same period (England, Wales and Northern Ireland). This means that the point at which someone with the standard PA starts to pay higher rate tax continues to be £50,270 until 2028
- – The additional rate threshold (top rate threshold in Scotland) falls from £150,000 to £125,140 from 6 April 2023. Note too, that £125,140 is the figure at which all PA is lost (see below)
- – There are no change to tax rates in England, Wales and Northern Ireland.
Impact of announcements in Autumn 2022
You will recall the yoyo of tax changes in Autumn 2022. Many of these final changes represented a ‘stealth’ tax, because as wages rise, a bigger slice of income falls to be taxed. This will be particularly noticeable in a time of inflation. Freezing the Personal Allowance (the amount that everyone can earn before it is taxed) and the basic rate band, for example, will push more people into the higher rate tax band.
Lowering the additional rate threshold will significantly increase the tax take from those on higher incomes. It is expected to bring something approaching a quarter of a million more taxpayers into additional rate tax from 2023/24.
Please see below to view the tax bands for the current 22/23 tax year
Where income is expected to be between £125,140 and £150,000 in 2023/24, bringing income into 2022/23 could mean the difference between being taxed at 40% in 2022/23, rather than being taxed at 45% in 2023/24; or between 41% and 47% in Scotland. Scottish taxpayers may also want to accelerate income to reduce the impact of the 1% rise to both the higher and top rates of income tax.
There are a variety of ways that this may be done, and we can help you review the possibilities in your circumstances.
Getting the best out of the personal allowance (PA)
Everyone has a PA. Look, wherever possible, to use the PAs available in your household. Now that the PA has been frozen, planning to avoid it being wasted is importance.
The standard PA is £12,570 throughout the UK. It can be higher if you are eligible for the Blind Person’s Allowance; or have an income less than the PA, and are eligible to make a transfer of the Marriage Allowance to your spouse.
You start to lose the PA if you have an ‘adjusted net income’ over £100,000. Adjusted net income is, broadly speaking, total taxable income before personal allowances, but after some deductions such as Gift Aid. The PA is clawed back by £1 for every £2 of adjusted net income over £100,000. When income is £125,140 or more, all PA is lost.
Planning potential: keeping the personal allowance
If you are in the £100,000 – £125,140 income bracket, planning to keep your taxable income below £100,000 can help you keep the PA. There are various possibilities here, including the following:
- – where one spouse is in a lower tax band, married couples may have opportunities to redistribute income, or transfer income-producing assets
- there can be further planning potential if you are in business with your spouse.
- – If you are in partnership, for example, it may be possible to review the profit-sharing ratio. If you are self-employed, increasing wages for a spouse who works in the business is another possibility, provided that this is commercially justifiable and reflects the underlying reality of the way your business is run.
Do contact your Client Manager or get in touch here to discuss how we can review your situation and help you to make the best decisions regarding your tax and finances.
Planning potential: savings and investments**
Interest of up to £1,000 from savings such as bank and building society accounts, unit trusts, and trust funds, can be sheltered from tax by the Savings Allowance. Availability of the allowance depends on your tax band.
|Income tax band||Savings Allowance|
The allowance applies across the UK. Scottish taxpayers therefore need to assess their savings position based on UK rates.
Individual Savings Accounts (ISAs)
ISAs are sometimes referred to as a tax ‘wrapper’ for investments: they allow you to make a tax-efficient investment, rather than dealing directly in the investment market and facing the tax consequences attaching.
The tax benefits here are considerable. ISAs are free of income tax and capital gains tax and do not impact the availability of the savings or Dividend Allowance.
Anyone over the age of 18 (or 16 for a cash ISA), who is resident in the UK, can open an ISA: for Lifetime ISAs, applicants must also be under the age of 40. Crown servants and their spouses not living in the UK are also eligible. Junior ISAs are available for children under 18.
There are four types of ISA: cash ISAs, stocks and shares ISAs, innovative finance ISAs and Lifetime ISAs. The total you can invest in any tax year is set by the government: for the tax year 2022/23, it is £20,000. This can be allocated across the different types, as you choose.
Although you cannot hold an ISA with, or on behalf of, someone else, you and your spouse each have an ISA subscription limit: this means you can invest £40,000 between you. It is also possible to open and manage an ISA for someone lacking the mental capacity to do so for themselves. This is done by applying to the Court of Protection for a financial deputyship order. In Scotland, application would be to the Office of the Public Guardian in Scotland.
Planning potential: review your position each year
ISA limits cannot be carried into future years. Use it before 5 April 2023, or lose it.
ISA subscription limits
|Type of ISA||2022/23 limit|
|Stocks and shares ISA||£20,000|
|Innovative finance ISA||£20,000|
Looking forwards, once the capital gains tax annual exemption falls from 6 April 2023, ISAs become an even more important tool for tax planning.
The venture capital schemes, providing finance for new, higher-risk companies, continue to afford individual investors with a significant source of tax relief.
The Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS) and Venture Capital Trusts (VCTs) were subject to sunset clauses in the original legislation, but have now been given a new lease of life. The government has given a commitment to extend them beyond 6 April 2025, and is changing some of the detail of the rules to provide more generous relief. This is the case with the SEIS, which offers the potential for 50% income tax relief, and where, from 6 April 2023, the annual investor limit doubles to £200,000. Please do talk to us for further details of any of these schemes.
** Please note that Harland Accountants and it’s employees are not regulated to give independent financial advice relating to investments and this publication is for information purposes only. Where investments are concerned, you should seek advice from a suitably qualified Independent Financial Advisor.
TAX BANDS, RATES AND ALLOWANCES
Year to 5 April 2023
|Basic rate||£12,571 to £50,270||20%|
|Higher rate *||£50,271 to £150,000||40%|
|Additional rate *||Above £150,000||45%|