16th February 2023
general
In this guide, we explain the main reductions to tax allowances in 2023, as well as some options for saving tax.
Dividend Tax
Currently you can earn up to £2000 in dividends before you start to pay tax. This could include profits from your own company or income from a share portfolio. This is reducing to £1,000 in April 2023, before dropping to £500 in April 2024.
If you own your own company, you have a few options for taking your income efficiently. You can combine dividends and salary to make the most of all available allowances. Even with the reduction in the dividend allowance, it is likely that drawing a small salary and taking the majority of your income as dividends is the most effective option.
There are a few other options for taking tax-efficient benefits from the company. For example, the company can make pension contributions or pay for certain types of life cover on your behalf.
If you receive dividends from an investment portfolio, you could move some of your holdings into an ISA. This means that all returns are free of tax. You can transfer up to £20,000 per year. Remember that moving funds into an ISA is a disposal for Capital Gains Tax purposes, and could result in a tax liability.
Capital Gains Tax (CGT)
The CGT exemption is currently £12,300. Any gains realised above this level are subject to tax of 10% for basic rate taxpayers and 20% for higher rates taxpayers. Property incurs rates of 18% and 28% respectively. CGT applies even if you give away an asset, unless the recipient is a charity.
The exemption is reducing to £6,000 from April 2023 and to £3,000 from April 2024.
The rate for discretionary trusts will remain at 50% of the main rate, i.e. £6,125 reducing to £3,000, and subsequently to £1,500.
Gifts to a spouse are exempt from CGT. You could transfer an asset to your spouse or into joint names before you sell it. This allows you to make use of both exemptions and basic rate bands.
If you have an investment portfolio, you can realise small gains every year to make use of your exemptions. This avoids large gains building up and potentially becoming taxable later. You can do this by switching funds, moving money into your ISA, or taking withdrawals to top up your income.
Income Tax
Income tax allowances and thresholds will remain static until at least 2028. High inflation means that both wages and prices will rise, pushing more people into the next tax band, while putting increased pressure on household finances. This means that even with a pay rise, employees are likely to have a lower disposable income than in previous years.
You can benefit from income tax relief if you make pension contributions. If you contribute personally, your payment will be grossed up, which means that for every £80 you pay in, HMRC will top up your fund with an additional £20. Higher and additional rate taxpayers can claim further relief through self-assessment.
If you make contributions through your employer, normally any relief will be calculated automatically. It’s worth seeking advice if you have more than one source of income. There are limits on pension tax relief, which are explained here.
You can also claim tax relief if you invest in some high-risk schemes, such as Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCTs). These provide income tax relief of up to 30% subject to a number of conditions. Advice is recommended if you are considering investing in these plans as they are not suitable for everyone.
Marriage allowance can offer a small saving on your tax bill if you are a basic rate taxpayer and your spouse is not fully utilising their personal allowance. Up to £1,260 of the personal allowance can be passed between spouses, saving up to £252 per year.
You may also be paying tax on interest from savings. While interest has been negligible over the last few years, increasing rates mean that more people will be paying tax on their savings. One option is to transfer some of your cash to a spouse to make use of both personal savings allowances. This is £1,000 per year for a basic rate taxpayer and £500 for a higher rate taxpayer (nil for an additional rate taxpayer). You can also move some of your cash to an ISA.
Inheritance Tax (IHT)
The IHT nil rate band has been frozen at £325,000 since 2009, and will remain so until at least 2028. Between high inflation, rising interest rates, and increasing asset values, it is likely that more and more estates will become subject to IHT.
The joint nil rate band helps to make estate planning simpler for couples, as together they can pass on up to £650,000, free of IHT. Additionally, the Residence Nil Rate Band can provide further relief if a family home is included within the estate.
If IHT is still a concern, you have several options to reduce this, providing you start planning early enough. For example:
It is likely that we will all pay more tax in the coming years, but with some simple planning, you could make some significant savings.
Please don’t hesitate to contact a member of the team to find out more about tax planning.
