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Income Tax – 2022/23 Tax Year End

27th March, 2019

In this blog mini-series, our Tax Partner, Terry Smith CTA ATT, provides his thoughts on a number of matters that should be considered prior to 5th April 2023. As well as confirming the details of allowances and forthcoming legislative changes, Terry also offers some advice to help clients make informed and timely decisions.

In this post, Terry provides an update and actions relating to Income Tax.

Other topics in this blog series:

  1. Thresholds and Allowances

The starting point in tax planning is to understand where your income is likely to fall relative to the tax thresholds. For 2022/23, the tax-free personal allowance is up to £12,570 and the next £12,571 to £50,270 is taxed at 20%. Higher rate tax of 40% is charged on income above £50,271 and additional rate tax of 45% is charged on income above £125,140.

The personal allowance is reduced by £1 for every £2 of income above £100,000. There is therefore no personal allowance at all where income exceeds £125,140. This also means that, over the income band £100,000 to £125,140, the effective rate of income tax is 60%. Or, to put it another way, tax relief at 60% is available on pension contributions and gift aid payments in this income band. To make the best use of tax allowances, sufficient income should be generated where possible to fully utilise the personal allowance and basic rate band. This may be done by careful planning of the timing of dividends from a private company or distributions from a family trust.

The personal savings allowance entitles basic rate taxpayers to £1,000 of tax free savings income and higher rate tax payers £500. However, additional rate tax payers receive no allowance.

Action Point

Individuals with incomes near these thresholds can reduce their tax liabilities by reducing their taxable income or by increasing their tax-deductible payments. There are a variety of ways that this can be achieved, from changing income into non-taxable forms, transferring income to spouses/civil partners, making pension contributions, making tax incentivised investments and by making donations to charity.

  • Dividend Tax Allowance

The dividend tax allowance of £2,000 is available for all taxpayers. Amounts falling within the dividend allowance are taxed at 0%. The allowance will however use any part of the lower rate bands that they would otherwise have fallen into. Thereafter any dividends falling within the basic rate band are taxed at 8.75%, but for dividends falling within the higher rate band, it is 33.75%. Then, for the dividends falling into the additional rate band, the rate is 39.35%. Married couples and civil partners have further opportunities for using their allowances and it should not be forgotten that children also have tax free allowances.

It is also important to remember that child benefit gets effectively withdrawn by 1% for every £100 of income earned over £50,000 (taking the highest earner in a household for these purposes), being reduced to nil once your income reaches £60,000. The effective rate of income tax within the band of £50,000 to £60,000 will depend on the greater the number of eligible children and the higher the effective tax rate. Again, where income falls within this band, mitigation by pension contributions or gift aid should be considered.

Action Point

Transferring income yielding assets to a spouse or civil partner could ensure both parties have income to use up relevant available allowances

All the articles in this blog series have been written to provide general advice that relates to all our clients. If you have questions regarding your own personal or commercial circumstances, please contact a member of the team today.

The tax year ends on 5th April, but please be aware that some changes may come into effect on 1st April. Plan ahead.