The new tax year is just around the corner. It’s been well publicised that there will be changes to our taxes to help reduce the spending deficit following the pandemic.
With these changes and the rise in the cost of living, there’s increasing pressure on personal finances. Make sure you know what’s happening with tax so that you can plan ahead this year.
Here are the key taxes and tax changes to note in 2022/23.
Income tax and your personal allowance
Income tax thresholds, including the personal allowance, have been frozen for the next four tax years.
They are, and will remain, as follows:
- personal allowance (tax-free) – up to £12,570 of income
- basic rate tax (20%) – further income up to £50,270
- higher rate tax (40%) – further income up to £150,000
- additional rate tax (45%) – income above £150,000.
By freezing thresholds for four years, the Government gives itself scope to increase its tax revenue in subsequent years while keeping the headline rate of tax the same – as more people drift past the static threshold. This is often referred to as a “stealth tax”.
National Insurance
Employee National Insurance is going up by 1.25 percentage points from 6 April 2022. This the precursor to the new health and social care levy, which will bolster NHS and social care spending after the last few bruising years for the sector.
While there is a percentage increase, there’s also a freeze in certain thresholds. The upper earnings threshold will be frozen at £50,270 until April 2026. That means that in 2022/23, any earnings up to £50,270 will face 13.25% (up from 12%) National Insurance contributions.
The lower earnings limit rises from £9,580 to £9,880. So, you don’t pay National Insurance contributions on earnings below £9,880, yielding a small benefit for some.
The new rates in tax on dividend income
Tax on dividend income will also increase by 1.25 percentage points in April 2022, again as a precursor to the health and social care levy. Dividend income is taxed in line with your income tax band.
Here are the new rates for 2022/23:
- basic rate: 8.75% (up from 7.5%)
- higher rate: 33.75% (up from 32.5%)
- additional rate: 39.35% (up from 38.1%).
You’re only taxed on income above the allowance, which isn’t changing. So, these tax rates are only applied to dividend income in excess of £2,000.
There are ways to manage this rise, such as using an ISA, which isn’t subject to tax within certain limits. Or, if you’re a director who pays yourself in dividends, you could consider moving more of your profits into a pension instead, which will lower your taxable income.
Other freezes to watch out for
There are other freezes to watch out for.
The capital gains tax allowance will remain at £12,300 per year for individuals until 2026. Landlords and shareholders especially should take note of this.
The allowance won’t rise with inflation, which means that gains on the sale of a second home or shares that aren’t in an ISA, are more likely to become taxable in future.
The inheritance tax nil rate band (£325,000) and residential nil rate band (£175,000) are both also frozen for four years, as is the pensions lifetime allowance (£1,073,100).
If you’d like any help with your tax planning in light of these changes and freezes, please contact us.
One of our experts will help you organise your finances in the most tax-efficient and cost-effective way for you, your business and your family.
