2023/24 Tax year updates & housekeeping for individuals

With a new tax year now underway, this article provides a summary of relevant tax changes for individuals, including measures announced or confirmed at the March Budget, and a reminder of some simple tasks to help keep your own (or your clients’) tax affairs in order. We’ve also included a handy table of the key changes to tax allowances for the 2023/24 tax year.

The freezing of income tax thresholds, discussed below, combined with wage inflation means more people will face higher tax liabilities. With the rising cost of living, simple steps to keep on top of your tax affairs and look for efficiencies become more important than ever.

Alongside some previously announced measures for the new tax year, March’s Budget also introduced significant changes to pension allowances, which took effect from 6 April 2023. These provide greater freedom for individuals, and particularly higher-earners, to make changes to their financial arrangements and potentially benefit from some tax-savings. Affected individuals may wish to take professional advice on their personal circumstances.

This article focusses on English, Welsh and Northern Irish taxpayers only as different income tax bands and tax rates apply to Scottish taxpayers.

Measures announced or confirmed at the Budget

Income tax

The tax-free personal allowance for 2023/24 remains at £12,570, having been frozen until April 2028 along with the levels of income from which basic and higher rate tax is payable.

For higher earners, the income threshold for the 45% additional rate of tax was reduced from £150,000 to £125,140 from 6 April 2023.

While the latter changes will obviously increase the tax paid by higher earners, freezing the other thresholds and allowances for such a long period of time will also increase the tax take as it means thresholds are not keeping up with inflation. So as wages and incomes rise, individuals get to keep less of any uplift they receive each year.  

Taxation of investment income and gains

Those with unearned income may need to review their investment approach as the tax-free dividend allowance (for non-ISA shares) was halved to £1,000 with effect from 6 April 2023, and will halve again from 6 April next year.

Similarly, the Capital Gains Tax (CGT) annual exemption reduced from £12,300 to £6,000 on 6 April 2023 and will drop to £3,000 from 6 April next year.

The Personal Savings Allowance is unchanged, so basic rate taxpayers continue to benefit from a £1,000 tax-free band for interest income (commonly from bank and building society accounts or unit trust investments), whilst higher-rate taxpayers can earn £500 of interest tax-free.

The Individual Savings Account (ISA) limit remains at £20,000, and CGT does not apply to investments held within an ISA. With the reduction in dividend and CGT allowances, holding investments in ISAs may be more beneficial than ever, so it is important to make use of the permitted £20,000 annual investment as far as possible.

Investment advice may be necessary before changing any investment strategy. With the reduced allowances for dividends and the lower CGT annual exemption, more people will need to consider whether they now need to complete a tax return, and register for Self-Assessment if required.

Pensions

The March Budget contained some significant relaxations to a number of pension allowances from 6 April 2023:

• The Annual Allowance limit (the limit on contributions which can be made to a pension fund tax-free each tax year) increased for most people from £40,000 to £60,000.

• Anyone with taxable income over £200,000 may be subject to a lower limit, although the figure for Adjusted income when assessing whether a tapered Annual Allowance applies has increased from £240,000 to £260,000.

• The minimum tapered Annual Allowance (for high earners, where adjusted income exceeds £260,000) has increased from £4,000 to £10,000.

• Where an individual has retired and already accessed their pension fund, the Money Purchase Annual Allowance (the limit on contributions by or on behalf of these individuals to a pension without incurring a tax charge) has increased from £4,000 to £10,000. This should provide greater freedom for employees who have returned to work after drawing a pension to continue paying into a pension fund.

• The Lifetime Allowance, which restricts the amount that individuals can accumulate in their pension fund before they incur a tax charge on accessing the pension has been scrapped, meaning greater freedom to build up a pension pot without the risk of tax being charged if its value exceeds a certain amount.

Further details can be found on the Gov.uk guidance on pension contributions.

Time to review your pension contributions?

The Government’s reasoning for introducing the above pension relaxations was to incentivise older workers, and particularly senior NHS staff, to remain in the workforce. However, the changes should allow many workers (especially higher earners) greater freedom to make provision for their retirement and benefit from tax-efficiencies.

For instance, as explained below, anyone with taxable income over £50,000 may be subject to the High Income Child Benefit Charge (HICBC) if they, or their partner, receives Child Benefit. Making pension contributions can reduce the adjusted net income against which the £50,000 HICBC threshold is assessed, meaning the resulting requirement to repay some/all of the Child Benefit received, and the associated Self-Assessment filing requirements may not apply.

For higher-earners with income in excess of £100,000, the Personal Allowance is progressively tapered to zero, which can lead to some employment/self-employment income being subject to an effective 60% tax rate.

At the same income level, entitlement to free childcare support is removed. The £100,000 threshold for both restrictions is assessed against adjusted net income (i.e. after pension contributions and payments to charities under Gift Aid have been deducted), creating a double incentive to make pension contributions for high-earning parents with income in excess of £100,000.

The Chancellor announced last month that by September 2025, working parents with children aged from 9 months to 5 years old who individually earn more than £8,670 (from April) but less than £100,000 adjusted net income per year will be able to benefit from 30 hours free childcare per week. The population affected by these £100,000 thresholds will therefore only increase, since greater numbers of parents with income over that level will be unable to benefit from free childcare as the scheme is expanded to younger children. Pension contributions will become of wider importance in order to reduce high income working parents’ adjusted net income down below the £100,000 threshold, allowing them to access Government-funded childcare support.

Finally, for personal pension contributions (outside of payroll), higher rate tax relief must be claimed via a Self-Assessment tax return. How tax relief is provided on workplace pension contributions depends on the nature of the scheme and how those payments are made. In some cases no additional claim for relief is needed, but the specifics vary by employer.

Pension contributions are a complex area, and we recommend individuals seek professional advice to ensure all the relevant factors are considered. Our ‘find an ATT member’ service can help you source reliable tax advice, but independent financial advice may also be required.

Pensions and Inheritance Tax planning

Whilst pensions are not generally seen as an investment asset, their value is commonly outside an individual’s estate for IHT purposes. This means they can potentially be passed down on death without suffering an IHT charge. The removal of the Lifetime Allowance mentioned above may lead to people using their pension as a way to transfer capital to the next generation on death in a tax-efficient manner.  Whilst this may be effective under current rules, the relaxation in pension allowances announced in the March Budget has not been universally welcome, and there remains the potential that the measures could be reversed by a subsequent government.

National Insurance Contributions (NICs)

For employees (and employers), the rates and thresholds for Class 1 NICs are unchanged for the new tax year. In most cases, employees pay Class 1 NICs at 12% on earnings between £12,570 and £50,270, then at 2% above that amount. Employers Class 1 liability is calculated at 13.8% on earnings over £9,100 per year. Full details can be found on the Government’s NIC rates and thresholds pages. Class 1A NICs remain payable by employers at 13.8% on the value of most benefits in kind provided to their employees.

For the self-employed, the rate of Class 2 NICs payable increased from £3.15 to £3.45 per week from 6 April 2023. These rates apply for those with profits in excess of the Lower Profits Limit of £12,570, which is the same point at which Class 4 NIC starts to be charged. This figure is identical to the personal allowance, so self-employed individuals now start to pay income tax and National Insurance at the same time.  

Class 4 NICs are chargeable at 9% on self-employment profits between £12,570 and £50,270, with the rate falling to 2% above that level.

Capital Gains Tax (CGT)

After the cut to the Annual Exemption mentioned above, the primary change to CGT from 6 April 2023 concerns the treatment of assets transferred between separating spouses and civil partners.

Separating couples will now have up to three years following the end of the tax year of separation to divide their assets without creating a CGT charge. There are also relaxations around dealing with a former matrimonial home in the event of permanent separation. The changes are explained in more detail in this article written by the ATT for AccountancyAge.

Summary table – key personal tax changes for 2023/24

	Was (2022/23)	Now (2023/24)
Additional (45%) rate threshold for income tax	£150,000	£125,140
Class 2 NIC rate (weekly)	£3.15	£3.45
Dividend allowance	£2,000	£1,000
CGT annual exemption	£12,300	£6,000
Pension Annual Allowance (maximum)	£40,000	£60,000
Tapered Pension Annual Allowance (minimum)	£4,000	£10,000
Adjusted income threshold for Annual Allowance tapering	£240,000	£260,000
Money Purchase Annual Allowance	£4,000	£10,000

 

General ‘housekeeping’ for the new tax year

The following points are commonly overlooked, but worth revisiting to check whether any action is needed early on in the tax year.

PAYE codes

Employees can review what goes into their PAYE code in their Personal Tax Account, via the HMRC app or by checking hard copies they may receive through the post. The starting point is how much personal allowance they’re entitled to, with adjustments potentially being made in respect of benefits in kind or employment expenses based on HMRC’s records. If anything doesn’t look right with their tax code, individuals without a tax adviser should contact HMRC to discuss changing it.

Taxpayers who employ an accountant or agent should send their adviser copies of any updated tax codes they receive, as agents are rarely notified of new PAYE codes, and in some cases cannot access the updated versions via their HMRC agent logins.

Employers cannot change a PAYE code without receiving fresh instructions from HMRC, so the onus is on the individual to check their coding notice, or to ask their tax adviser for help.

Marriage Allowance Transfer

Where one person in a marriage or civil partnership doesn’t use their full tax-free personal allowance (£12,570), 10% of that amount can be transferred to their spouse/civil partner to reduce the amount of tax payable by up to £252.

This claim is only available where the recipient of the transfer is a basic rate taxpayer, but can be backdated by up to four years. Further details, including how to apply, are available at https://www.gov.uk/marriage-allowance.

Child Benefit

Receipt of Child Benefit by a household can bring unexpected tax consequences. In brief, if either partner in a household which receives Child Benefit earns over £50,000, a Self-Assessment tax return may be required. The higher-earner in the couple can be obliged to repay some or all of the Child Benefit received by them or their partner during the tax year via the High Income Child Benefit Charge (HICBC). More detailed guidance on the HICBC is available from the Low Income Tax Reforms Group (LITRG).

Inflationary effects on wages mean more individuals are likely to be brought into the scope of the HICBC and therefore the Self-Assessment regime. Affected individuals should register for Self-Assessment before 6 October 2023 if they need to file a tax return for the tax year ended 5 April 2023 in order to pay the HICBC.

Recipients of Child Benefit with income over £60,000 will be obliged to pay back the full amount of Child Benefit received in the year via a tax charge on their Self-Assessment return. Equally, if the partner of someone in receipt of Child Benefit earns over £60,000, they will incur the HICBC instead. If either party earns between £50,000 and £60,000 part of the Child Benefit received will need to be repaid via the HICBC.

Whether the Child Benefit is received by the high earner or their partner, unless there is another requirement to submit a tax return, it may be beneficial to opt out of receiving the payments. This avoids the need to file a tax return but will not leave the couple any worse off overall. Depending on the couple’s circumstances, it is often beneficial to only stop the payments, whilst maintaining the Child Benefit claim, as this counts towards State Pension entitlement for non-working or low income parents. Further information is available from the LITRG guidance.

Pension contributions can offer a way of retaining Child Benefit payments and not incurring the HICBC even where income exceeds £50,000 – see Time to review your pension contributions above.

Summary

While the start of the new calendar year might be a time we seek to make new resolutions, the start of the new tax year is the perfect time for a financial audit. Considering the above measures now and making any changes necessary to your financial affairs could improve your tax position over the remainder of the tax year, potentially simplifying your tax affairs and leaving you with more cash in your pocket.