The new tax year (2023-24) marks the beginning of a new fiscal period. This brings fresh opportunities to save on your taxes. What has changed and how do you make the most of your new allowances?
In this short guide, our Financial Planners here at Punter Southall share some of the highlights from 6 April 2023 and how they could bear upon your wealth and finances.
Lifetime Allowance scrapped
Before 6 April 2023, the Lifetime Allowance (LTA) “capped” the total amount that an individual could save in pensions, tax-free, at £1,073,100. Withdrawals made over this limit would be subject to a 55% tax charge (if taken as a lump sum) - or, 25% if taken as income.
Now, in 2023-24, the LTA charge has officially been scrapped.
However, please note that the tax-free limit on lump sums still applies. For instance, an individual can take up to:
25% of the capital value of a pension, if the value is less than £1,073,100 or
25% of £1,073,100, or
25% of the “protected value” of a pension (if there is lifetime allowance protection).
Annual allowance increase
On 6 April 2023, the maximum annual allowance for pensions increased by 50%. Now, an individual can contribute up to £60,000 to his/her pension(s) each tax year - or, up to 100% of earnings (whichever is lower).
Naturally, this means that many people will now be able to save more into their pensions, if they so choose, and still receive tax relief. A Basic Rate taxpayer is entitled to 20% tax relief on contributions, whilst a Higher Rate taxpayer can claim 40%.
Another key change is the Money Purchase Annual Allowance (MPAA) rules. These are often “triggered” when an individual starts accessing certain pension benefits. Previously, this limited an individual’s annual allowance to £4,000 per year. In 2023-24, this limit is now £10,000.
This means that more over-55s (e.g., those who triggered the MPAA rules either by design or by accident) will be able to increase their contributions. However, speak to a financial planner if you are affected by the MPAA or want to understand more about your options.
Capital gains tax (CGT) allowance reduction
Within an ISA, you can generate capital gains on your investments without capital gains tax (CGT). Moreover, outside of your ISA, you can also do this up to a limit - known as your Annual Exempt Amount.
Before 6 April 2023, this tax-free CGT allowance was £12,300. Now, in 2023-24, it has been reduced to £6,000 per year. It is expected to fall even further to £3,000 in the 2024-25 tax year.
This means that it will be harder for many investors to generate tax-free returns. However, strategies still exist to help mitigate needless tax liability.
For instance, maximising your ISA allowance (£20,000 each tax year) can help. Also, if you are married or in a civil partnership, you can transfer assets between you to make sure that you maximise both of your ISA allowances and Annual Exempt Amounts.
Dividend tax allowance reduction
Just as capital gains are tax-free when generated inside an ISA, dividends are also free of tax within the same structure. Before 6 April 2023, an individual could also earn up to £2,000 in dividends per tax year, outside of an ISA, without tax.
In 2023-24, this tax-free allowance for dividends has been lowered to £1,000 per year. In the 2024-25, it is expected to reduce even further to £500 per year.
It is also important to clear up any confusion about dividend tax rates. In September 2022, the then Chancellor Kwasi Kwarteng announced a reduction of 1.25% in dividend tax across the board from April 2023.
This was then u-turned on 3 October 2022 after cross-party criticism. Now, in 2023-24, the dividend tax rates are confirmed at 8.75% (Basic Rate), 33.75% (Higher Rate and 39.35% (Additional Rate).
Again, maximising your ISA allowance can help to mitigate tax on your dividends. Asset transfers between spouses and civil partners may also be appropriate. Speak with a financial planner to explore your tax planning.
Income tax changes and freezes
It is important to highlight that the new 2023-24 tax year did not raise the starting point for Income Tax and personal National Insurance.
Instead, the tax-free Personal Allowance remains frozen at £12,570 until 2027-28. The starting point for the 40% Higher Rate is also frozen at £50,271.
National Insurance Contributions (NICs) are unchanged for 2023-24. For earnings between the primary threshold and the upper earnings limit, employees must still pay 12%, For earnings over the latter limit, 2% tax is due.
Over the coming tax years, rising UK average wage growth is expected to push more people into paying tax for the first time. Over 1m people could be pulled into the Higher Rate band.
Speak to a financial planner if you want to avoid paying “stealth tax” in the coming years. For instance, you could explore ideas like salary sacrifice to boost your pension in exchange for a reduction in take-home pay.
Another key change in 2023-24 is the threshold for the 45% Additional Rate, which has been lowered to £125,140, down from £150,000. Those earning between these figures would do well to seek financial guidance because this income risks getting taxed, in real terms, at 60%.
This is due to tapering restrictions and the steady elimination of the personal allowance (i.e., by £1 for every £2 earned over £125,140).