With just one month to go until the end of the financial year at midnight on April 5, taxpayers across the country need to get up to speed with the raft of tax changes coming into force.
The end of this tax year is arguably one of the most important ever after Rishi Sunak and Jeremy Hunt chose to freeze most personal tax thresholds until 2028 and reduce several key allowances.
This means pay rises - which were running at 7.3% in the private sector and 4.2% in the public sector in October to December - will lead more workers to pay more tax on their incomes, with cuts to certain allowances raising the tax burden even further.
This is known as fiscal drag – where the income level at which taxes are collected does not increase in line with inflation or income growth.
So, what are the tax rules you need to consider for your personal finances?
Frozen personal allowance
The personal allowance – the amount you can earn tax-free every year – will remain at the current amount of £12, 570 until April 2028.
Earn less than that sum, and you will pay no income tax at all, but any income you earn above that figure will be taxable at the basic rate of 20%.
What does this mean: Low-income earners - those earning less than £12,570 – may find themselves paying tax for the first time if an even modest pay rise pushes their income into the basic rate territory.
Note, however, this only applies to the amount above the £12,570 mark.
For example, if you earn £14,000, you will only pay the 20% tax on the £1,430 above the £12,570 threshold.
Frozen higher rate of tax
The other key frozen threshold is for the higher rate of income tax of 40%, which will also remain the same at £50,270 until April 2028.
Again, only earnings above that figure will pay the 40% rate.
Those earning above £100,000 have a very unique tax challenge – for every £2 of taxable income above £100,000, they lose £1 of the personal allowance of £12,570.
Combine the loss of the personal allowance with the 40% income tax rate, and those earning between £100,000 and £125,140 are effectively paying an eye-watering 60% income tax on that proportion of their income.
What does that mean: The 60% band is not official but if you consider that for every £100 of income between £100,000 and £125,140, you only receive £40 after tax.
That amounts to 60% because £40 is deducted in income tax and another £20 is lost to the tapering of the personal allowance.
Once you’re earning £125,140 or more, you don’t get any personal allowance at all.
Reduced additional rate of tax
For additional rate taxpayers - those earning above the £150,000 mark - the threshold at which the very highest 45% income tax rate kicks in will reduce to £125,140.
While this means high earners will see more of their income subject to the 45% additional rate, the threshold cut will also have implications for those currently earning below the £150,000 mark.
What this means: Around 792,000 taxpayers will be impacted by the additional income tax threshold reduction, according to HMRC.
While the average cash loss for those earning between £125,140 and £150,000 will be £621 in 2023 to 2024, for those earning more than £150,000 the average cash loss will be £1,256.
Another impact on those finding themselves paying 45% tax for the first time, is that that they will lose all entitlement to the Personal Savings Allowance.
This allowance means basic rate taxpayers can earn up to £1,000 of bank or building society interest tax-free each year, while higher rate payers can only earn £500 of interest tax-free.
But those paying 45% income tax get zero allowance.
Reduced Capital Gains tax
The other big change affects Capital Gains Tax – a tax that is charged on the profits you make when selling investments held outside of ISAs and pensions.
From April 6, the annual Capital Gains Tax (CGT) exemption will halve from the current level of £12,300 to £6,000 and halve again in April 2024 to £3,000.
What this means: Investors will face potential capital gains tax bills at much lower levels of profit, whether they are selling investments such as shares or funds, property (other than their main home) or any other investment subject to CGT.
The rate of CGT you pay is dependent on the asset you are selling and your personal tax status.
Reduced Dividend allowance
Dividend tax is applied to the income investors receive from shares, funds or investment trusts or to the income business owners often pay themselves via dividends.
In the current tax year, people can earn up to £2,000 in dividend income tax-free but from April 6 that will halve to £1,000 from the current exemption.
It will then reduce again to a mere £500 in 2024.
Up until April 2018, the dividend allowance was £5,000, so by 2024 it will have been cut by 90%.
What this means: Those with dividend-paying assets held outside an ISA or pension might run the risk of breaching their dividend allowance limit when it halves next year.
How much dividend tax you pay is linked to your income tax brackets, so it is charged at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
The alternative of holding investments in an ISA lets your money compound and grow without the risk of taxation.
Those with shares or funds outside of ISAs might consider selling these and then repurchasing them inside an ISA, an approach referred to as Bed and ISA.
Personal Savings Allowance has remained the same since 2016
The Personal Savings Allowance lets you earn interest on your savings without paying tax.
While basic rate taxpayers have a generous £1,000 personal savings allowance, those paying the higher 40% tax rate are in more peril as the allowance drops down to £500.
Additional tax rate payers receive no savings allowance at all.
What this means: When the allowance was first introduced in 2016, savings rates were low, which meant it would take a hefty chunk of money for tax charges to be applied.
But rising interest rates and frozen income tax bands mean more people could find their existing savings are subject to tax.
For this reason, keeping too much cash in your emergency pot or other savings accounts can be risky.
For additional tax rate payers who receive no concession at all, it is vital they hunt out more tax-efficient options for their savings, or if they are married and their spouse is a non-taxpayer or subject to a lower band, they consider transferring cash savings to them.
How taxpayers reduce the income tax hit
Get ahead of the tax changes by taking advantage of tax-free allowances on ISAs and pension contributions, as well as crystallising any capital gains.
Remember, not all tax allowances can be transferred on to the next financial year.
Shelter savings from tax in a cash or investment ISA: Savers can shelter up to £20,000 this tax year in an ISA either in cash or investments.
This is particularly beneficial for those looking to protect their bank account savings from tax if they are at risk of breaching the Personal Savings Allowance.
Younger savers can consider a Lifetime ISA: Lifetime ISAs have a very specific goal, allowing younger savers to put away up to £4,000 per year for a deposit on a first home (providing it costs less than £450,000) or for their retirement after the age of 60.
Lifetime ISAs give you a 25% Government cash bonus (up to a maximum of £1,000) on contributions.
The £4,000 is part of your annual ISA allowance, so if you save £4,000 then you only have £16,000 to save into other types of ISA such as a cash or Stocks & Shares ISA.
Just remember, LISAs have strict rules: They are only available to those aged between 18 to 39 and the money can only be used for the purchase of a first property or be held until the account holder is at least 60 to help fund retirement.
The only other way the accountholder can withdraw money is if they are terminally ill and can prove they have less than 12 months to live.
Give your pension a boost: Pension saving is particularly attractive for those looking to reduce their income tax liability and who don’t need to touch their money until they retire.
That’s because any money invested in a pension not only benefits from compounding over the long term – an effective way to counteract the damaging effects of high inflation - but also protects against income tax as the contributions attract tax relief.
While basic rate taxpayers get 20% in tax relief added to their pot with each contribution, those on the higher 40% tax rate get a further 20% and additional rate taxpayers receive a further 25%.
A 20% taxpayer looking to add £100 to their pension only needs to spend £80 as they receive £20 in tax relief.
For a 40% taxpayer, the actual cost is just £60 and for an additional rate taxpayer, it falls to £55.
This makes pension saving undoubtedly the most tax-efficient way of saving money for retirement and one of the best ways to reduce your income tax liability, particularly those subject to the highest tax bands.
Just remember that for most people the annual allowance you can pay into your workplace or private pension per tax year without having to pay tax on the contributions is 100% of your salary, up to £40,000 gross – a limit that encompasses all contributions across all pension arrangements, tax relief and employer contributions.
However, once you have used your full allowance for the current tax year you can also carry forward any unused annual allowance from the previous three tax years.
Be warned, however, once the money is added to your pension, you cannot touch it until you are 55, or 57 from 2028. Plus, go over the pension contribution limit and you risk incurring a tax charge.
Don’t have spare cash – then consider Bed & ISA or Bed & Pension for other investments: If you don’t have pots of cash sitting around but do have shares or funds held outside a tax wrapper such as in a General Investment Account, then it might make sense to transfer them into an ISA account or pension.
To beat tax allowance cuts, investors can sell shares or funds and repurchase them with an ISA – a process known as "Bed and ISA" – to keep future returns out of the reach of tax charges.
A similar process applies to investments moved into a pension (such as Self-Invested Personal Pension), where a "Bed & Pension" transfer can be utilised.
While you may pay CGT on any profits above your annual allowance, moving the money into an ISA or SIPP means you won’t have to in the future – something that will become very beneficial as allowances dwindle.
Ask your employer about salary sacrifice: If you fear a pay rise or bonus will tip your income into a higher tax band, it could be worth asking your employer about "salary sacrifice".
Some employers will let their staff reduce their salary or forgo bonus payments in lieu of increased pension contributions.
Both employee and employer will pay lower National Insurance contributions (NIC) as a result, which makes pension saving even more tax efficient.
Those close to earning above the £50,270 earnings threshold where the higher 40% tax rate kicks in, could dip under it by using salary sacrifice pension contributions.
Just remember, while salary sacrifice will give your pension a healthy boost and reduce a tax bill, agreeing to a lower salary can have an impact on your ability to access credit, such as a mortgage, as you will have a lower income to play with.
Employee benefits such as life cover, and holiday, sickness and maternity pay may also be affected , so ask your employer for a personalised calculation of how the scheme will affect your take-home pay and benefits.
Don’t forget about interspousal transfers and marriage allowance: As personal tax allowances come under pressure, married couples and civil partners have a tax advantage.
Savings and investments can be switched to a spouse subject to lower rates to tax without triggering a tax event.
This allows the couple to make use of two sets of allowances, so that more assets are held by whichever spouse is subject to lower rates of tax.
This means couples can max out two sets of personal savings allowance, dividend allowance and CGT allowance to reduce the overall amount of tax exposure for the family, so they need to consider who holds any savings that generate taxable income carefully to ensure these allowances and rate bands are utilised efficiently
Before transferring shares, funds or cash to your other half, just remember that they will become the full, legal owner of the assets, so tread carefully if you have any doubts about the strength of your relationship.
Separately, some couples can also ease their tax burden by claiming marriage allowance, where a lower-earning partner transfers up to £1,260 in the 2022-23 tax year to the higher-earning partner, which can reduce their tax bill by up to £252.
Note, however, this is only available for couples where neither pays the higher rate of tax.
Finally, families with children or grandchildren could also look to maximise the Junior ISA allowance of £9,000, a great way to begin tax-exempt savings for children.
Check your tax code: Making sure you pay the right amount of tax is vital because millions of tax codes are wrong every year and it is your responsibility - not your employer or HMRC - to check it.
Visit Gov.uk to check your tax code and other income details to make sure it is correct for your circumstances.
Don't ignore other lucrative tax allowances that can reduce your tax bill: There are dozens of other allowances such as the trading allowance of up to £1,000 for casual income such as from baby-sitting or odd jobs in the community.
There is a property allowance of £1,000 to account for any income derived from your home or land, such as letting someone park on your driveway or store items in your garden shed, and the £7,500 rent-a-room scheme if you let out a room to a lodger in the home you live in.
There is also tax relief on maintenance payments for the divorced, uniforms you need to buy or repair and maintain for work and charity donations plus a whole host of others so do your research to cut your tax burden.
When it comes to charitable donations, for example, if you pay tax at the 40% rate or higher, you may be able to benefit from tax relief on gift aid donations you make to charity.
Spouses should consider making sure that any charitable donations are made by the spouse with the higher marginal tax rate to maximise income tax relief.
