Tax planning is an essential element of any individual’s financial plan. It can help you to reduce the amount of taxes that you owe and ensure that you are taking advantage of all available tax incentives. Tax planning allows you to structure your income, deductions, credits, and other elements in a way that will maximise after-tax returns and minimise the overall amount of taxes paid.
Taking the time to carry out proper tax planning each year can make a significant difference in your financial outlook over the long term. Tax laws are constantly changing and it’s important to stay up-to-date on any new developments that may affect your personal situation. Keeping informed reducing taxes can provide extra opportunities.
Additionally, by anticipating taxes when you create your financial plan, it’s possible to significantly increase how much money you will have in retirement. In this article we look at some of the main taxes and reliefs that changed from 6 April 2023.
TAX-FREE PERSONAL ALLOWANCE
The personal tax allowance normally increases slightly each year, but the threshold for 2023/24 has been frozen at the 2022/23 limit of £12,570. You’ll only pay income tax on any earnings which are above the £12,570 threshold. So, if you earn £18,000 in a tax year, the taxable element of your income is £5,430.
The tax-free Personal Allowance will reduce if you earn a higher level of income. For every £2 that you earn above £100,000, the Personal Allowance reduces by £1. This means that if you earn £125,140 or more, your personal tax allowance is zero.
2023/24 INCOME TAX RATES AND THRESHOLDS
INCOME TAX IN ENGLAND, WALES, AND NORTHERN IRELAND
• Personal allowance: No tax payable on this income - £0 – £12,570
• Basic rate income tax: 20% tax on the proportion of income which falls into this tax bracket - £12,571 – £50,270
• Higher rate income tax: The part of your income which falls into this tax band is taxed at 40% £50,271 – £125,140
• Additional rate income tax: This is the highest rate. The income you earn above this threshold is subject to tax at 45% - £125,140 upwards
INCOME TAX IN SCOTLAND
• Personal allowance: No tax on this income - £0 – £12,570
• Starter rate: £12,571 – £14,732 (19% tax)
• Basic rate: £14,733 – £25,688 (20% tax)
• Intermediate rate: £25,689 – £43,662 (21% tax)
• Higher rate: £43,663 – £125,140 (42% tax)
• Top rate: Over £125,140 (47% tax)
2023/24 NATIONAL MINIMUM WAGE
National Minimum Wage is worked out on the basis of the employee’s age, although there are different rates which apply for apprentices.
• Apprentices and under 18s - £5.28 per hour
• Age 18 - age 20 - £7.49 per hour
• Age 21 - age 22 - £10.18 per hour
NATIONAL LIVING WAGE (NICS)
The National Living Wage is the minimum amount which employers must pay to employees who are 23 or older. In April 2023 it increases to an hourly rate of £10.42.
The Class 1 Primary Threshold and Class 2 Lower Profits Limit will remain aligned with the Personal Allowance (£12,570) until April 2028. The Upper Earnings Limit and Class 4 Upper Profits Limit will remain aligned to the Higher Rate Threshold at £50,270 through to April 2028. The Lower Earnings Limit (£6,396) and the Small Profits Threshold (£6,725) will remain unchanged in 2023/24. For 2023/24, the Class 2 rate will be £3.45 a week and the voluntary Class 3 rate will be £17.45 a week. The government will fix the level at which employers start to pay Class 1 Secondary NICs for their employees (the Secondary Threshold) at £9,100 from April 2023 until April 2028.
If you own shares in a company then you may receive dividend payments, which are a share of the company’s profits. These dividends are a source of income, so as a result you’ll need to pay tax on them. The dividend allowance is changing, with the current £2,000 threshold reducing in April 2023, and then again in April 2024.
This means that you’ll pay tax on more of your dividend income. The dividend allowance for each year is:2023/24: £1,000; 2024/25: £500. The 2023/24 Dividend Tax Rates: Basic rate taxpayers: pay the dividend ordinary rate 8.75%; Higher-rate taxpayers: use the dividend upper rate 33.75%; Additional-rate taxpayers: pay dividend tax at the additional rate 39.35%
CAPITAL GAINS TAX (CGT) ANNUAL EXEMPT AMOUNT
CGT is payable on any profit you make after ‘disposing’ of an asset that you own. Disposing of an asset usually means that you’ve sold it, but also includes giving it away to someone, swapping it for something else, or being compensated for its loss in other ways. The amount of Capital Gains Tax that you owe is based on the profit or ‘gain’ that you make, not from disposing of the asset. For Individuals 2023/24 limit of £6,000; Trustees limit of £3,000.
2023/24 CAPITAL GAINS TAX FOR BASIC RATE TAXPAYERS
• Gains from other residential property 18%
• Gains from other chargeable assets 10%
2023/24 CAPITAL GAINS TAX FOR HIGHER RATE TAXPAYERS
• Gains from other residential property 28%
• Gains from other chargeable assets 20%
You might also be eligible for Business Asset Disposal Relief on any assets that qualify. This was formerly known as Entrepreneur’s Relief.
IT’S IMPORTANT TO ANTICIPATE TAXES AS YOU CREATE YOUR FINANCIAL PLAN
If appropriate switching some income from one spouse or registered civil partner to the other could help save tax. It is important to always aim to use both individuals’ personal allowances.
Tax-efficiency is a key consideration when investing because it can make such an enormous difference to
your wealth and quality of life. However, the type of investment and tax-efficiency you should be looking
for depends firstly on whether your priority is to save a lump sum for the future, or to draw an income today.
Individual Savings Accounts (ISAs) are very tax-efficient savings and investment accounts. You can use them to save cash or invest in stocks and shares. As a UK resident aged 18 or over you are eligible to allocate your entire allowance of £20,000 (for 2023/24) into a Stocks & Shares ISA, or into a Cash ISA or any combination of these. You’ll pay no Income Tax on the interest or dividends you receive from an ISA and any profits from investments are returned free of Capital Gains Tax.
Chancellor Jeremy Hunt announced in the Spring Budget 2023 statement that he has abolished the pensions Lifetime Allowance to boost economic growth. The Lifetime Allowance had been frozen at £1,073,100 until April 2026 and currently affects 8,000 people with pension pots above this figure. On 6 April 2023 this tax charge was abolished.
The Chancellor also announced he is increasing the annual tax-free allowance by 50%, from £40,000 to £60,000. For those who have stopped work and ceased pension contributions and may now wish to resume paying into a defined contribution pot, the money purchase annual allowance (MPAA) rose from £4,000 to £10,000 from April 2023.
For very high earners, the so-called taper rules will be eased to allow for increased tax-efficient pension savings. Currently, taxpayers lose £1 of annual allowance for each £2 of ‘adjusted income’ above £240,000. This threshold will rise to £260,000.
For higher earners it is even more beneficial, with higher-rate taxpayers only needing to contribute £60 in order to boost their pension fund by £100, and additional-rate taxpayers only needing to pay £55. If you are a higher earner it is now even more important to capitalise on making larger pension contributions to private pensions or to increase salary-sacrifice pension contributions through your workplace, to try and lower your taxable income going into the 2023/24 tax year.
The Dividend Allowance from 6 April 2023 has been cut to £1,000 per year. This will make it more expensive, from a tax perspective. If you are a business owner when taking money out of your Limited company, Directors and Shareholders should consider reducing the amount of dividends which are paid out at the end of the 2023/24 tax year to avoid paying Income Tax on dividend distributions. Another significant change coming to investors is the reduction in the Capital Gains Tax allowance from £12,300 to £6,000 per year from 6 April 2023. A further reduction to the Capital Gains Tax allowance will take place from £6,000 to £3,000 from 6 April 2024.
Timing your disposals is particularly important. Depending on the level of your income, making a further disposal either side of the tax year end could save or cost you tax. The decreasing Capital Gains Tax allowance will lower the chargeable gain investors can realise tax-efficiently at the end of the 2023/24 tax year. With some careful forethought it could help minimise a future Capital Gains Tax bill. Inheritance Tax planning is generally not related to the tax year end, although it is always a good time to review your Will and ensure your stated wishes are up to date. There are certain Inheritance Tax exemptions that are related to each tax year.
LOOKING TO DISCUSS TAX PLANNING ADVICE SHAPED AROUND YOU?
It can be difficult to keep up with tax changes at the best of times, but with four chancellors in seven months, a mini-budget which was largely, but not fully, reversed and a more recent Autumn Statement, obtaining professional advice is essential.
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