Key tax changes in 2023

This year has brought us a huge amount of change to personal finances stretching from income tax thresholds to complex pension reforms to other investment-related taxations.

Here we look back at those changes – and a snapshot of what’s to come in 2024.

Capital Gains Tax (CGT)

If you plan to dispose of assets (in other words, sell some investments) then you can use your annual capital gains tax allowance. In April the allowance for 2023/2024 dropped from £12,300 to just £6,000, meaning you can make a profit of up to £6,000 only without paying tax. Anything above is taxable.

In the tax year 2024/2025 the allowance is dropping to just £3,000. So it’s important to do some planning to save on tax. This only applies to money withdrawn from a General Investment account. Anything from an ISA is free of capital gains tax.

Dividend-paying investments

Each of us can receive up to a set amount per year in dividends tax-free. After that you’ll pay 8.75% for basic rate, 33.75% for higher-rate and 39.35% for additional-rate taxpayers.

From April the tax-free allowance fell from £2,000 to £1,000. It will fall further to £500 in April 2024.

Take action: It’s possible to move any dividend-paying shares into an ISA to avoid extra tax bills.  If shares are moved into an ISA – quirkily named actioning a ‘bed and ISA’ – no tax is due.

Income tax

Income tax bands for basic and higher rate remained frozen in 2023. The policy of not increasing allowances in line with the cost of living, or fiscal drag as it is known, forces millions of earners to pay more tax as wages go up. So while there is no official change, workers will see a rise in how much tax they pay.

Plus, for higher earners, the threshold at which the additional rate of 45% kicks in was reduced to £125,140 from £150,000 in April.¹ This means more people will fall into the highest tax bracket.

Pension annual allowance

There are limits placed on how much you can save each year without incurring a tax penalty.

In April, the annual allowance was raised from £40,000 to £60,000 for most, although you can’t pay in more than you earn. The allowance includes your and your employer's contributions and the amount paid in by HMRC.

There are different annual allowance rules for higher earners, however. The allowance reduces by £1 for every £2 earned over £260,000, which was increased from £240,000 in April.

The allowance can only drop down to £10,000 – upped from £4,000 in April.

The annual allowance of £60,000 doesn’t apply to those who have started taking a flexible income from their pensions, however. There is a separate allowance (see MPAA section below).

Lifetime Allowance (LTA)

As of 6 April 2024 there is no longer a limit on how much you can save in a pension for tax purposes.

The limit, known as the Lifetime Allowance (LTA), is currently £1,073,100. Any excess was previously taxed at a maximum of 55% but since April 2024 this is no longer be the case. Until then, whilst the LTA remains in place, the LTA tax charge will be removed, meaning no one has needed to pay an LTA tax charge since 6 April 2023.

Despite the changes, unless you have transitional protection, the tax-free lump sum you can take at retirement remains capped at £268,275 – 25% of the final LTA of £1,073,100.

Money Purchase Annual Allowance (MPAA)

If you start drawing directly from invested money purchase (defined contribution) pensions (over and above the tax-free lump sum), the amount that you can pay into a money purchase pension will be reduced to the lower, money purchase annual allowance.

This ensures money withdrawn from money purchase pensions isn’t used to fund further pension contributions on which you’d receive tax relief.

In April the money purchase annual allowance was increased to £10,000, from £4,000.

Interest rates

The Bank of England base rate was at 3.5% at the beginning of 2023. Since, there have been five hikes to reach the current rate of 5.25%.² There’s still chance for one more hike when the Monetary Policy Committee meets on December 14th.

Inflation

The rate of inflation in the UK has been falling – following a 41-year high of 11.1% in October 2022. Inflation has continued to fall and it was at 4.6% in October.

The Bank of England says it expects inflation to keep on falling in 2024 and reach its 2% target in the first half of 2025.³ That means prices would still be rising, but they would be only rising gradually.

Coming soon

In the Autumn Statement Chancellor Jeremy Hunt announced a series of changes to personal finances for 2024. These include: 

National Insurance

Class 1 primary National Insurance paid by employees and currently charged at 12% is being cut by 2 percentage points to 10% from 6th January 2024. For an average worker earning an annual salary of £35,400 they will be just over £450 better off.⁴

National Insurance is to be cut for the self-employed. Class 2 National Insurance contributions are being abolished from 6 April 2024, saving £192 per year for the self-employed.

There will also be a 1 percentage point cut to Class 4 National insurance payments to 8% from 6 April 2024, therefore saving the average self-employed person on £28,200 a year £350 in 2024/25.

ISA investors

Savers and investors will see more flexibility within ISA rules from April 2024. Under current rules you can open multiple accounts in a tax year but they need to be different types of ISAs. For example, you can open a cash ISA and a stocks and shares ISA, but not two cash ISAs or two stocks and shares ISAs.

The new measures will allow savers and investors to have multiple subscriptions to ISAs of the same type each tax year from 2024/25 onwards.⁵

ISA investors will be allowed to hold certain fractional shares contracts in their ISA.⁶

Investors using an Innovative Finance ISA will be able to invest in open-ended property funds and Long-Term Asset Funds from April 2024.⁷

The Chancellor also announced he will align the age at which you can apply for an adult cash or stocks and shares ISA to 18.⁸ Currently you can apply for an adult cash ISA from age 16.

Under 18s can still benefit from a Junior ISAs with a £9,000 annual limit.

Pensions

A new consultation⁹ was launched to give savers a legal right to require a new employer to pay pension contributions into an existing scheme so workers have just one pension pot.

Get professional help

There’s no doubt about it – financial planning can be complex, but is a vital tool for tax planning. Speak to your Wealth Manager for your tax, pension and retirement planning needs.