The Personal Tax Allowance for 2022/2023 and other key things you should know
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
With the new tax year upon us, some aspects of taxation have changed. But as several allowances and thresholds have been frozen, the points that have not changed are even more significant. In this guide, our team at Castlegate (financial planners in Grantham) outline the main tax allowances and explain how you can make the most of them. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
The Personal Allowance and tax thresholds
The personal tax-free allowance is currently £12,570 and will be frozen until at least 2026. The higher and additional rate thresholds (£50,270 and £150,000 respectively) are also frozen. This means that if your earnings increase with inflation, you will pay a higher amount of tax.
While higher taxes are difficult to avoid entirely, there are several strategies that can make your tax affairs more efficient, for example:
- Making contributions to a pension can reduce your taxable earnings and even take your income into a lower tax bracket.
- Marriage allowance means that one spouse can allocate up to £1,260 of their unused personal allowance to the other. This can save up to £252 per year in tax.
- If you have savings income, including interest and chargeable gains from investment bonds, up to £1,000 of this may be tax-free. This allowance is reduced to £500 for higher rate taxpayers and nil for additional rate taxpayers. Additionally, up to £5,000 of savings income may be tax-free if your earned income is less than £17,570. Ownership of assets can be passed between spouses to make the most of these allowances.
Tax on dividends
In the current tax year, the rate of tax on dividends will increase by 1.25%. If you own shares in a private company, you can combine salary, income, and director’s loan repayments (if you have invested money in the company) for tax-efficiency. You can also make contributions to a pension through the company, which is an extremely efficient way of extracting profits.
If you own a share portfolio, the tax position is more difficult to control as you will pay tax on dividends whether they are paid out or reinvested. You can reduce the tax on your investments by moving funds into an ISA (up to £20,000) every year.
UK individuals have a dividend allowance of £2,000 per year. Gifting some shares to a spouse can ensure that you make use of both allowances.
National Insurance contributions are also increasing by 1.25%. However, this is partially offset by an increase to the threshold at which you start to pay contributions. This is increasing to £12,570, in line with the personal allowance, from July 2022.
If you are employed, you can reduce your National Insurance contributions by paying into your pension via salary sacrifice.
Company directors can reduce their National Insurance contributions by taking more of their income as dividends as opposed to salary. This also reduces the employer’s National Insurance costs.
Remember, your National Insurance contributions allow you to build up entitlement to state benefits, including the State Pension. If your earnings dip below £6,396 and you are not receiving credits or paying voluntary contributions, your eligibility for these benefits may be reduced.
Capital Gains Tax
The Capital Gains Tax (CGT) threshold is frozen at £12,300 until 2026. This means that if you sell assets, you will pay tax on any profits above this level. Assuming investment and property values continue to increase, this means that higher levels of tax could become payable.
To mitigate this, there are several options:
Make use of your annual exemption every year, for example, by switching funds, withdrawing an income, or moving money into your ISA.
Hold assets jointly with your spouse so that you can make use of two allowances. Transfers to a spouse or into joint names are free of CGT.
You can also defer tax on realised gains, potentially indefinitely, by reinvesting the proceeds in an Enterprise Investment Scheme (EIS). This is a high-risk investment and you should seek advice if you are considering it.
Given that the Inheritance Tax (IHT) nil rate band has been frozen for over ten years, it is likely to remain so for some time yet. Estates valued at over £325,000 pay tax of up to 40% on the excess. Married couples can benefit from a joint nil rate band of £650,000. If the estate includes a family home passing to a lineal descendant, up to a further £175,000 can be claimed (£350,000 for a jointly owned property).
Some options for reducing IHT include:
- Making gifts to family members, trusts, or charities. Gifts of up to £3,000 per year are immediately out of your estate, while most larger gifts drop out of your estate after seven years. Charitable donations are immediately exempt.
- Leaving at least 10% of your estate to charity reduces your IHT rate from 40% to 36%.
- Investing in business assets, including private company shares, Alternative Investment Market (AIM) shares, or Enterprise Investment Schemes may allow you to benefit from 100% business relief.
- While it doesn’t reduce the tax payable, a whole of life policy placed in a suitable trust can provide your beneficiaries with a means of paying the tax outside the estate.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585