Tax Allowances in 2023/2024 – How the Changes Affect You

Below, we have summarised the main changes and how they will affect you.

Income Tax
While most of the income tax rates and thresholds are not changing, the additional rate tax threshold has now reduced from £150,000 to £125,140. This means that anyone earning over this amount will pay 45% tax on more of their income.

However, this is partially offset by the increase in pension allowances (see below). By contributing to a pension, you can reduce your effective earnings and save tax while boosting your retirement pot.

Pensions
The main changes to pension rules are:

• The Annual Allowance has increased from £40,000 to £60,000. With carry forward, this means that it’s possible to contribute up to £240,000 to your pension in a given year. However, personal pension contributions are still capped at the level of your earnings and employer contributions must be deemed to be reasonable by the Local Inspector of Taxes. This change will affect mainly higher earners and those wishing to make a large one-off contribution to a pension from their company.
• The Lifetime Allowance of £1,073,100 will be scrapped. Initially, the tax charge (up to 55%) will be waived, however from 2024/2025, the allowance will be removed altogether. This will result in substantial savings for those with large pension funds. Employees with generous defined benefit pensions (e.g. senior doctors) stand to benefit most.
• The Money Purchase Annual Allowance has increased from £4,000 to £10,000. This means that individuals who have already taken taxable benefits from their pension fund can contribute more towards their retirement.

Investments
The annual capital gains tax (CGT) exemption has reduced from £12,300 to £6,000, and will drop to £3,000 from April 2024.

Discretionary trusts will have half of the allowance available to individuals, i.e. £3,000 reducing to £1,500.

This means that when you sell investments, the amount on which you pay tax will be higher. You can potentially reduce your capital gains tax bill by:

• Gradually moving more of your investments into an ISA. While ‘bed and ISA’ contributions are still disposals for CGT purposes, this can help to avoid large gains accumulating in the future.
• Using your exemption each year, for example by switching funds or making withdrawals.
• Owning assets jointly with a spouse to make use of both sets of exemptions.
• Using losses to offset gains.
• Investing realised gains in qualifying investments, such as an Enterprise Investment Scheme (EIS). This allows you defer tax on gains you have already realised, while avoiding tax on any gains achieved by investing in the scheme. Thes investments are complex, high risk, and subject to a number of conditions. Advice is recommended.

Shareholders
Companies with profits over £250,000 will see their corporation tax bill rise from 19% to 25%. This will not only affect business owners, but also investors, as the net profits distributed will be reduced.

Shareholders will be doubly impacted as the dividend allowance reduces. Previously, dividends of up to £2,000 per year were free of tax. This allowance is reducing to £1,000 this year, and to £500 from April 2024.

Company directors can take remuneration in the form of salary, dividends, pension contributions, and reclaiming director’s loans. An accountant can advise you on the most efficient combination.

Investors may not have the same level of control of the company’s tax position, but you can reduce income tax on your investments by holding assets in ISAs or investment bonds.

What is Not Changing?
The following income tax allowances will be remaining the same, and will most likely be frozen until 2028:

• The personal allowance will remain at £12,570. The thresholds at which you pay basic or higher rate tax will also stay the same.
• The allowances available for savings interest are not changing.
• Marriage allowance will remain at £1,260.
• National Insurance contributions will stay the same, although the temporary increase of 1.25% will now be replaced by a Health and Social Care levy.

Additionally, the amount you can contribute to an ISA each year will remain at £20,000 and the Inheritance Tax nil rate band is frozen at £325,000.

While these thresholds and allowances are not changing, prices, earnings, interest, and asset values are continuing to increase. This means that the allowances will be worth less over time.

Tips for Efficient Tax Planning
The basic principles of good tax planning remain the same:

• Make use of your ISA allowance.
• Pay as much into your pension as you can, staying within current allowances.
• Use your capital gains exemption and where possible, use losses to offset gains.
• Where practical, divide assets and income sources between spouses to make use of both sets of allowances.
• Make a will and consider making gifts during your lifetime to reduce Inheritance Tax.

A financial adviser can help you navigate the changing tax position to make the most of your allowances.

Please don’t hesitate to contact a member of the team to find out more about tax planning.