QUESTION: As we enter a new tax year for companies and individuals, what changes are coming in for 2023/24?
ANSWER: A number of changes take effect to income tax from this month that will affect UK taxpayers. Many of these measures were announced by Chancellor Jeremy Hunt in his Autumn Statement on November 17. According to Hunt, these decisions will see everyone pay “a bit more tax” from the 2023/24 tax year onwards.
One of the biggest announcements made in the Autumn Statement was the lowering of the additional-rate threshold for income tax from £150,000 to £125,140. Around 660,000 taxpayers currently pay the additional rate of income tax. A further 232,000 people will fall into the tax bracket once the changes come into place in April 2023. This is in stark contrast to previous Chancellor Kwasi Kwarteng’s announcement that the 45 per cent additional rate would be scrapped altogether, which has now been reversed.
By lowering the additional rate tax threshold to £125,140, the government has aligned the top rate of tax with the personal allowance taper. Under current legislation, taxpayers’ personal allowance is reduced by £1 for every £2 their net income exceeds £100,000. That means if your income is £125,140 or higher, your personal allowance will be zero. Essentially, anyone who falls into the additional rate tax band from April onwards will pay income tax on all their earnings.
The basic rate of income tax will remain unchanged at 20 per cent in April 2023, despite previous plans to lower it to 19 per cent. In the 2022 Spring Statement, then-Chancellor Rishi Sunak announced the basic rate would drop to 19 per cent in April 2024. This plan was then supposed to be brought forward to April 2023 by Kwasi Kwarteng in the mini-budget. However, the basic rate of income tax will instead stay fixed at 20 per cent “indefinitely”, saving the Government approximately £6bn a year.
The Chancellor announced several threshold freezes that will affect taxpayers over the coming years.
The following freezes were already in place until 2026, but will now be extended a further two years until 2028:
• the personal allowance threshold at £12,570
• the higher-rate threshold at £50,270.
Freezes to the various National Insurance contribution thresholds are also in place, which are important to be aware of alongside income tax.
With thresholds frozen until 2028, taxpayers across all bands will see a greater proportion of their earnings going towards their income tax bill as wages rise with inflation. The Office for Budget Responsibility (OBR) estimates these freezes will create an additional 3.2m new taxpayers. This will cause 2.6m people to fall into a higher tax bracket. For example, individuals who currently pay the 20 per cent basic rate of tax will need to pay 40 per cent on their income above £50,270, if it exceeds that level between now and 2028.
Furthermore, people on lower incomes may need to tighten their purse strings as inflation continues to soar while the personal allowance threshold remains fixed at £12,570.
According to the Government, the impact of the lowering of the additional rate tax bracket measure will vary depending on individual circumstances. On average, the cash loss will be £621 for those who earn between £125,140 and £150,000, and £1,256 for people with incomes above £150,000.
However, those who do fall into the additional tax rate band in April will be able to take advantage of the more generous pension relief it offers. Basic rate relief of 20 per cent is automatically applied to each person’s pension contributions, and people who pay the additional rate can claim a further 25 per cent on top of that.
The lifetime allowance cap on how much you can save in a pension will also be scrapped from April 2023 in a bid to encourage older people back to work.
The amount you can earn before paying capital gains tax on sales of assets such as a second home or shares outside an Isa is being cut. The allowance is falling from £12,300 to £6,000 in April, and will be reduced again next year to £3,000.
The tax-free allowance on dividends (payments made to a company’s shareholders) is also due to fall, from £2,000 to £1,000, before being reduced further to £500 from April 2024.
Business owners are facing additional tax with corporation tax rising from 19 per cent to 25 per cent for companies with more than £250,000 in profits. Hunt did also announce a new scheme that will allow businesses to deduct money invested in equipment from taxable profits.
:: Feargal McCormack (firstname.lastname@example.org) is partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies