4 important tax changes in 2023 and what they could mean for you

4 important tax changes in 2023 and what they could mean for you

One of the things 2022 is likely to be remembered for is the revolving door of tax changes. One reason for this was that the UK had four chancellors during the year, one of which had a very different approach to addressing fears that the UK was about to plunge into a recession at the time.

That chancellor was Kwasi Kwarteng, who unveiled his “mini-Budget” in September 2022, which included a swathe of tax regulation changes designed to stimulate the economy. Instead, the pound fell to a record low against the dollar and there was a sharp rise in the interest rate the UK pays on longer-term borrowing.

Furthermore, the Bank of England launched a £65 billion bail out to save pension funds. Not long after, Mr Kwarteng and then prime minister, Liz Truss, had to U-turn on a key announcement made in the mini-Budget, resulting in both their resignations within weeks.

To add to the confusion, Mr Kwarteng’s successor as chancellor, Jeremy Hunt, announced more tax changes during his autumn statement in November 2022. If the merry-go-round of changes left you confused, read on to learn how four key taxes will change from April 2023, what it might mean for your money, and how we may be able to reduce your tax liability.

Income tax

In his autumn statement, chancellor Jeremy Hunt revealed that the freeze on the Personal Allowance would be extended from April 2026 to April 2028. This means that the Personal Allowance – which is the amount you can earn before Income Tax is charged – will remain at £12,570 until 2028, and the higher-rate tax threshold will stay at £50,270.

In the 2023/24 tax year, the basic-rate of Income Tax will typically be charged at 20%, and the higher-rate will be charged at 40%. According to the Telegraph, the higher-rate threshold freeze could result in millions of workers being pushed up into the higher-rate tax band as salaries rise but the thresholds remain the same.

Mr Hunt also announced changes to the 45% additional-rate threshold, which could affect you if you’re a higher earner, as the threshold will reduce from £150,000 to £125,140 from April 2023. Furthermore, in 2023/24, moving up to the additional-rate means that you will typically lose your Personal Allowance.

As such, you’re likely to become one of 2 million workers effectively paying 60% in Income Tax, something highlighted by media reports.

As financial planners experienced in maximising tax efficiency, we may be able to help you to reduce your liability to Income Tax. This could be achieved, for example, by making the most of your pension contributions or by using certain investments.

Dividend Tax

If you have investments or are a business owner, changes to the Dividend Tax allowance that come into force in April 2023 could affect you. While the allowance is £2,000 in the 2022/23 tax year, it falls to £1,000 from April 2023 and then to £500 from April 2024.

Any amount you earn in dividends over and above these amounts will typically be subject to the tax, which in 2023/24 will be charged at 8.75% if you’re a basic-rate tax payer. If you’re a higher-rate taxpayer it will be charged at 33.75%, and if you’re an additional-rate taxpayer it is 39.35%.

If these changes could affect you, we would be happy to discuss ways that you may be able to reduce your exposure to the tax. This could include, for example, restructuring your investments so that they are held in a Stocks and Shares ISA, which are not liable to Dividend Tax.

Capital Gains Tax

Mr Hunt also announced that the Capital Gains Tax (CGT) threshold will drop from £12,300 to £6,000 in April 2023. It will then fall to £3,000 as from April 2024.

As CGT is usually charged at between 10-28%, depending on the type of asset sold and your marginal rate of tax, the lower thresholds could significantly increase your liability to CGT. With this in mind, you may want to take advantage of the threshold while it is still £12,300, something we can help you with.

One way you may be able to do this, for example, could be to crystallise losses that could be carried forward to offset future and potentially higher CGT charges.

Inheritance Tax

In his 2022 autumn statement, Mr Hunt announced that the freeze on the Inheritance Tax (IHT) threshold would remain in place until April 2028. The threshold – commonly known as the “nil-rate band” (NRB) – is the amount you’re allowed to have in your estate before IHT is charged.

This will now remain at between £325,000 and £1 million, depending on your circumstances, until 2028. As IHT is typically charged at 40%, using the NRB as effectively as possible could help increase the amount of money you leave to loved ones.

According to the Telegraph, the extended freeze could result in the average UK household’s IHT bill jumping from £215,000 in 2019/20 to £287,000 in 2027/28. There is some good news though, as the government allows you to make several gifts every tax year that could help you reduce your exposure to IHT, or even negate it.

As financial planners, helping clients reduce their exposure to IHT is central to what we do. We would be happy to discuss ways we could help you lower or potentially negate your exposure to IHT, so that you can leave more money to friends and family.

Get in touch

While we hope this blog is useful, please remember that it is not an exhaustive list of the legitimate tax breaks that the government allows you to use. If you would like to ensure that your wealth is as tax-efficient as possible, or discuss any of the above changes, please call us on 0800 434 6337. We would be pleased to help.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.