Between April and January, tax revenues were up 9.9%, totalling £660 billion. And with the new tax year likely to increase the tax take thanks to reducing and frozen allowances, investors need to understand how to protect themselves.
For investors, the tax grabs will come from every angle. From the slashing of the capital gains and dividend allowance to the lowering of the additional-rate tax threshold, here are some ways you could end up paying more tax. Plus, our top tips to help you shelter your money.
This article isn’t personal advice. If you’re not sure what’s right for you, ask for financial advice. Pension, ISA, and tax rules can change, and benefits depend on your circumstances. Scottish tax bands and rates of tax are different. Investments can fall as well as rise in value so you could get back less than you invest.
Income tax and the national insurance threshold will remain frozen
Most income tax and National Insurance (NI) thresholds will remain frozen in the new tax year. This means you’re likely to pay more tax on income. Especially if you’re a higher earner.
The personal allowance is the amount you can earn before paying income tax, and it’s frozen at £12,570. After this point you start paying different rates of tax depending on whether your income is above certain thresholds – which are also frozen (or, in one case, being reduced).
The point at which you start paying 40% tax has stuck at £50,270. The £100,000 level at which the personal allowance starts to be withdrawn has also remained frozen.
With regular wages rising an average of 6.7% in the last three months of 2022, the frozen thresholds mean more people have crossed into paying a higher rate of tax. At the same time, because wage rises aren’t keeping pace with inflation, it means more tax coming out of a pay packet that’s worth less in real terms to begin with.
The additional-rate threshold also hasn’t moved from £150,000 since it was introduced in 2010. But from April, it will drop down to £125,140. This means anyone earning between the old threshold and the new one will lose an average of £621 a year. Those earning over £150,000 will lose an average of £1,256. It’s expected to make the government an extra £420 million in 2023/24.
Tax tip 1 – consider paying into a pension to shelter your finances from the income tax changes
If you’re looking at your retirement provision, you can potentially lower your income tax liability by paying into a workplace or personal pension (like our Self-Invested Personal Pension). When you pay into your pension, some of the money that would’ve gone to the government as tax goes towards your pension instead. This is known as pension tax relief.
How much can I pay into a pension and how much tax relief will I get?
If you’re a UK resident under 75, you’ll automatically get 20% basic-rate tax relief added to anything you pay into your personal pension – even if you don’t pay tax.
You can usually pay in as much as you earn up to the annual allowance across all your pensions and get tax relief. This is currently £40,000. From 6 April this will increase to £60,000. If you earn £3,600 or less (including non-earners) you can still pay in up to £3,600, including tax relief.
Lifetime and annual allowance spring budget changes – what they mean for you
If you’re a higher-rate taxpayer, the tax benefits are even more appealing. You can claim back up to a further 20% or 25% in tax relief through your tax return. Scottish taxpayers pay different rates of tax and could claim up to 26% in tax relief. And From 6 April, they can claim back up to 27%.
If your employer runs a salary sacrifice scheme, you could also consider giving up part of your salary and taking the difference in pension contributions. It won’t leave you with more cash in your pocket. But it will mean you’ll end up handing over less of your money to the taxman as you won’t pay income tax or NI on the amount of income you give up.
If you’ve already taken money from your pension, or you’re a high earner, you might have a lower annual allowance. Money in a pension isn’t usually accessible until age 55 (rising to 57 in 2028).
More on paying into a pension, including lower allowances
The dividend and capital gains tax allowance will fall
The dividend allowance is the amount you can earn from dividends without triggering a tax charge. In April it’s set to fall from £2,000 to £1,000 and will halve again the following April. This will hit anyone earning significant dividends on investments held outside of an ISA or a pension as soon as they exceed the new smaller allowance.
Investors face a capital gains tax (CGT) blow too. CGT is the tax you pay on any profit when you sell or gift an asset outside of a tax wrapper. You can currently make £12,300 tax free, but this allowance is being slashed from £12,300 to £6,000 on 6 April 2023 – before being halved to £3,000 the following April.
Try the capital gains tax calculator
Tax tip 2 – consider holding investments in an ISA or a pension
Investing in an ISA or a pension is a popular way to save or invest and lets you benefit from generous tax breaks offered by the government. Anything you hold in an ISA or pension is free from UK income and capital gains tax.
If you already hold investments outside one of these tax shelters, you could consider moving them into a more tax-efficient account. That way you won’t have to worry about either dividend tax or CGT on these investments. This is sometimes known as a Bed and ISA or a Bed and SIPP.
While the ISA and SIPP offer protection from capital gains tax, selling the shares to move them into one could result in a capital gain or loss.
If you hold shares in an HL Fund and Share account, you could consider using our new share exchange service. You can move your shares directly to your HL Stocks and Shares ISA or Self-Invested Personal Pension.
If you’re not an HL client, you can easily open these accounts by making a payment or transferring investments.
More on our Share Exchange service
How much can I pay into an ISA?
You can save and invest up to £20,000 each tax year. You can pay this into one ISA or split this allowance across other types of ISAs depending on your goals.
For example, you can only pay £4,000 into a Lifetime ISA each tax year, and this forms part of the overall £20,000 ISA allowance.
More on ISAs, including the different types available
Tax tip 3 – consider transferring assets to a spouse or civil partner
There are special rules for CGT on gifts or assets you transfer to a spouse or civil partner. You can usually transfer investments without having to pay CGT.
This can be beneficial before selling an investment or if one partner has a lower tax rate. You could hand over enough assets for both of you to realise gains within your CGT allowances and you could end up paying no tax at all on your gains.
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