As the UK prepares to enter the new tax year on 6 April 2023, several significant changes to the tax system will come into effect. These changes will affect individuals, companies, and pensioners alike and are part of the UK government’s wider plan to increase revenue and reduce the country’s debt. In this article, we will examine the key changes that came into effect on 6 April and what they may mean for taxpayers.
Here’s a quick summary of the important changes:
The threshold for the 45% Additional Rate of income tax is being lowered to £125,140. Other tax bands have been frozen until 2028. |
Corporation tax rates have been increased for companies earning over £50,000 in profits, up to a maximum of 25% for companies earning over £250,000. |
The tax-free allowance for Capital Gains is being reduced from £12,300 to £6,000. This will decrease again in 2024 to £3,000. |
The tax-free allowance for income from Dividends is being reduced to £1,000 and will fall again in 2024 to £500. |
The lifetime limit on tax-free pension savings has been scrapped. This was previously £1,073,100. |
Income tax changes
Income tax is the primary form of tax paid by individuals, other than the Value Added Tax (VAT) included in many goods and services. The rate of tax paid depends on your total taxable income. This taxable income can be reduced by claiming tax reliefs, such as when you have to pay for your own business travel costs.
Individuals have a tax-free Personal Allowance, which allows you to earn a certain amount of income tax-free. This amount is currently £12,570 and has been frozen until 2028. The Basic rate of income tax is 20%, and applies to those earning between £12,571 and £50,270. These thresholds have also been frozen until 2028.
The income threshold for the Additional rate of tax, which is 45%, has been lowered from £150,000 to £125,140. Here’s a summary of income tax rates and the income band changes:
Tax Band | Previous income band | Income band as of April 2023 | Income Tax Rate |
Personal Allowance | First £12,570 | First £12,570 | 0 |
Basic Rate | £12,571 to £50,270 | £12,571 to £50,270 | 20% |
Higher Rate | £50,271 to £150,000 | £50,271 to £125,140 | 40% |
Additional Rate | Over £150,000 | Over £125,140 | 45% |
HOW WILL THIS AFFECT TAXPAYERS?
The lowering of the Additional rate threshold will obviously mean that more individuals will be paying the maximum tax rate of 45%. However, the freezing of the other income bands will also lead to more individuals paying higher rates of tax. When these thresholds aren’t increased along with inflation and wage growth, more and more individuals will find themselves within the higher tax brackets in future financial years.
It is important to note that the Personal Allowance is reduced by £1 for every £2 earned between £100,000 and £125,140. In essence, this means that those earning over £100,000 in the Higher rate band will be paying tax on a larger portion of their income, and those in the Additional rate have no Personal Allowance and pay a 45% tax on all of their income.
Individuals who find themselves being pushed into a higher tax band may benefit from setting up a salary sacrifice arrangement or by increasing their pension payments. This will decrease your taxable income and help keep you within a lower tax band.
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Corporation tax changes
Corporation tax is the tax paid by limited companies on their profits. The corporation tax rate was previously a flat 19%, but the 2023 Spring Budget introduces rates which change depending on a company’s amount of profits.
Companies earning under £50,000 in profits will continue to be taxed at 19%. Companies earning above £250,000 will be taxed at 25%. Companies earning between £50,000 and £250,000 can apply for Marginal Relief, which will make their effective tax rate somewhere between 19% and 25%, depending on their profits.
You can use HMRC’s online calculator to figure out how exactly this will affect your tax obligations.
tax-free allowance changes
For many forms of tax, individuals have a certain amount that is tax-free. These tax-free amounts are commonly called ‘allowances’, and include the Personal Allowance for income tax described above. The allowances for capital gains tax, dividends income, and pension payments all changed on 6 April 2023.
CAPITAL GAINS TAX
Capital gains tax is paid when you sell an asset that has increased in value since you bought it. Capital gains tax is paid on this increase in value, not the total value of the asset. Most people encounter this form of tax when selling property, but it also applies to company shares and other forms of investment.
The tax-free allowance for capital gains was previously £12,300 but has now been reduced to £6,000. It will fall again in April 2024 to £3,000.
DIVIDENDS INCOME TAX
Dividends are a way for companies to distribute profits to shareholders. You can click here for our full guide to dividends and how they are taxed.
The tax-free allowance for income earned through dividends has been lowered from £2,000 to £1,000. It will be lowered again in April 2024 to £500.
pension savings
Prior to April 2023, there was a limit on the amount of pension savings you could accrue without paying additional tax on it. This lifetime allowance was £1,073,100. This has been scrapped, meaning you do not have to pay tax if your lifetime savings exceed a certain amount.
It is important to note that there is still an annual allowance for pension payments, which is currently £60,000. This means you will pay tax on pension contributions which exceed £60,000 in a single financial year.
Maximum State Pension payouts have also increased in 2023, as they are meant to do every year. The State Pension amount is guaranteed to increase annually by whichever of the following measures is higher:
- Average earnings,
- Inflation, as measured by the Consumer Prices Index (CPI),
- Or 2.5%.
With inflation at 10.1% as of September 2022, this had led to the highest ever single increase in the State Pension.
Those qualifying for the New State Pension will now receive a maximum of £203.85 a week (up from £185.15). Those who reached State Pension age before April 2016, and are on the older Basic State Pension, will now receive £156.20 (up from £141.85).
alcohol duty changes
HMRC’s Spring Budget also announced changes to the tax charged on alcoholic products. The policy document outlines how these changes will affect the average consumer:
- 4% ABV pint of draught beer will be 0 pence higher.
- 4% ABV 500ml bottle of non-draught beer will be 5 pence higher.
- 5% ABV pint of draught cider will be 2 pence higher.
- 5% ABV 500ml bottle of non-draught cider will be 5 pence higher.
- 40% ABV 25ml serving of whisky will be 3 pence higher.
- 5.4% ABV 250ml can of spirits-based RTD will be 6 pence lower.
- 11% ABV 250ml glass of still wine will be 5 pence higher.
The document also states that individuals who drink stronger alcoholic products may pay more through the revised duty structure. Individuals who drink draught products in on-trade venues (such as pubs) will pay less tax than on the equivalent non-draught product in off-trade venues (such as supermarkets).
bottom line
These 2023 Spring Budget changes will see more individuals paying higher rates of income tax over the next 5 years. Companies earning over £50,000 annually will be paying higher rates of corporation tax. That said, 70% of companies, which is around 1.4 million businesses, are expected to remain unaffected by the change.
Individuals earning income through dividends or capital gains are also expected to pay more in total tax as the relevant tax-free allowances have been reduced and will be reduced again in 2024.
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