The Budget and beyond: preparing for the new tax year

Post by Mearns & Company in News

The Spring Budget created some unexpected headlines, particularly with the surprise proposed abolition of the lifetime allowance. Taken with the announcements from the Autumn Statement, the tax planning landscape for 2023/24 is now in sharp focus. 

November’s Statement – a Budget in all but name – increased the overall tax take by more than most Budgets. In contrast the Spring Budget cut net revenues, although by a smaller amount, while still containing those headline surprises.

Heading into the new tax year, the following key areas of change – and non-change – mean you should start your planning early.

Income tax The personal allowance and higher rate threshold (outside Scotland) will be frozen until April 2028. The additional rate threshold (and top rate threshold in Scotland) will be reduced by nearly £25,000 to £125,140 for 2023/24.

Not only will this mean you pay more tax as your income rises – even if it grows slower than inflation – but it also means you may move up a tax band. For example, the Office for Budget Responsibility estimates by 2024/25 there will be two million more higher rate taxpayers than would have been the case had the higher rate threshold been indexed rather than frozen.

Dividend allowance The dividend allowance will halve from the current £2,000 to £1,000 in 2023/24 and then again to £500 in 2024/25 – a tenth of its original level in 2016/17. These reductions make it even more important to maximise your UK tax-free ISA investment.

Capital gains tax The annual exempt amount will fall from £12,300 in 2022/23 to £6,000 in 2023/24 and then to just £3,000 in 2024/25. The maximum corresponding amount for trusts will be half these figures.

Pensions The Budget contained three significant changes to pension rules that take effect from 6 April 2023:

• The lifetime allowance, which had been frozen at £1,073,100, will effectively be abolished. All the potential tax charges associated with it will disappear for 2023/24.
• The annual allowance will increase by 50% to a maximum of £60,000 and to a minimum of £10,000 where taper rules apply. The same £10,000 figure will apply to the money purchase annual allowance, which is triggered when income is first drawn flexibly.
• There will be a new monetary cap on the tax-free pension commencement lump sum of £268,275, unless you have earlier lump sum protection.

These reforms are designed to encourage high earners to stay in work and the retired to re-join the labour force. However, they have wider relevance and could mean your retirement planning strategy needs to be revised.

Corporation tax From 1 April 2023 the main corporation tax rate for companies with profits of at least £250,000 will rise from 19% to 25%. For companies with up to £50,000 profits, the 19% rate will continue to apply. For companies with profits in the £50,000–£250,000 band, the first £50,000 of profits will also be taxed at 19%, with the excess subject to an effective rate of 26.5%.

These changes may discourage directors from extracting corporate profits through dividends. Pension contributions have become more attractive, following the Budget allowance changes. Similarly, if you are self-employed incorporating your business has lost some of its appeal from the tax viewpoint.

If you have been left financially dizzy after Mr Hunt’s one two punch of Autumn Statement and Spring Budget, please talk to us about a tax planning review.

The Financial Conduct Authority does not regulate tax advice. Tax treatment varies according to individual circumstances and is subject to change.

The value of your investment and the income from it can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit with your overall attitude to risk and financial circumstances.

Occupational pension schemes are regulated by The Pensions Regulator.