FREEZING INCOME TAX BANDS
It had already been announced that the income tax personal allowance (£12,570) and higher (40%) rate threshold (£50,270*) would be frozen until 5 April 2026, instead of increasing each year in line with inflation.
The Chancellor has now announced that these freezes will continue until 5 April 2028.
As earnings increase, this will result in more higher rate taxpayers and is often referred to as ‘fiscal drag’ because it will raise more tax without actually increasing income tax rates.
MORE TO PAY 45% INCOME TAX
The income level at which point the ‘additional’ 45% rate of income tax starts to apply will be reduced from £150,000 to £125,140* from 6 April 2023.
The new £125,140 threshold ties in with the £12,570 personal allowance being gradually withdrawn for those with income in excess of £100,000. For these individuals, once their income exceeds £125,140, they will no longer be entitled to a personal allowance and, from April 2023, will move straight into 45% income tax.
*It should be noted that, for Scottish taxpayers, income tax rates and thresholds are, for certain income types, separately set by the Scottish government.
ALL QUIET ON PENSIONS
In good news, we did not see measures to further restrict tax relief for pension contributions.
Please do talk to us about how your pension contribution strategy could help to lessen the impact of the above income tax changes.
NIC BANDS FROZEN
Employers will be relieved that there are no more changes to NIC rates and bandings or therefore consequential payroll software changes!
Like the main income tax bandings, NIC thresholds are now also frozen until 5 April 2028. This means that employers’ NIC will continue to apply at 13.8% to earnings in excess of £9,100 a year (£175 per week) and employees and the self-employed will continue to pay 12% and 9% respectively on earnings/profits between £12,570 and £50,270 and 2% thereafter.
The 1.25 percentage point increase to NIC rates that has just been removed from 6 November 2022, will not be making a return from 6 April 2023.
DIVIDEND INCOME – REDUCED 0% BAND
For all individuals, the first £2,000 of dividend income is taxed at 0%.
The government have now decided that this ‘dividend allowance’ of £2,000 will be reduced to £1,000 in the 2023/24 tax year and then again to just £500 in the 2024/25 tax year.
It should be remembered that the income tax rates applied to dividend income outside of the allowance have only recently been increased to 8.75%, 33.75% and 39.35% (for dividend income falling into basic rate, higher rate and additional rate bands respectively).
Combined, these measures will mean that those reliant on dividend income will pay more tax.
If you are a director/shareholder, please contact us to discuss the best strategy for extracting profits from your company from 6 April 2023.
