Understanding UK's Income Tax Changes from 6th April 2023

As we step into a new financial year, changes to the UK tax system have been announced that will inevitably affect millions of taxpayers. Key among these changes is the freezing of base rate and higher rate tax thresholds, leading to higher tax charges for many. Furthermore, significant changes have been made to the dividend allowance and capital gains tax allowances. Here's what you need to know:

Frozen Tax Thresholds

For the tax year beginning 6th April 2023, the base rate and higher rate tax thresholds have been frozen at £12,570 and £50,271, respectively, until 2028. As salaries and income rise over time, this freeze will effectively drag more taxpayers into the higher 40% tax rate bracket. In fact, it's expected that over a million people will face these higher tax charges for the first time due to this measure.

Lowered Additional Rate Threshold

The additional rate threshold, the income level at which an individual loses their personal allowance, has been lowered from £150,000 to £125,140. This is because £1 of the personal allowance is withdrawn for every £2 of income above £100,000. As a result, an estimated 232,000 taxpayers will fall into this additional rate tax bracket for the first time, per HMRC's report. Those with income between £125,140 and £150,000 will face an average cash loss of £621.

This change is projected to raise about £420,000 in the 2023-24 tax year, impacting around 792,000 taxpayers.

Tax Increases in Scotland

In Scotland, there will be increases in several personal tax rates. Specifically, the higher rate of tax on income between £43,663 and £125,140 will rise by 1p to 42p, and the top rate of tax (for income above £125,140) will also rise by 1p to 47p. Scots earning above £43,663 will consequently pay more income tax than the previous year, causing a larger gap in income tax liabilities between those with equivalent earnings in Scotland and the rest of the UK.

John Cullinane, CIOT director of public policy, commented on this disparity saying, "The start of the year means further income tax divergence for higher earning Scots... The Scottish government’s decision to tax higher earners more is intended to generate extra money to fund public services, but it may further fuel perceptions of a growing disparity between the tax treatment of higher earners in Scotland and elsewhere in the UK.”

Moving Forward

The changes taking effect this tax year can feel daunting. Navigating the new tax landscape may seem complex, but it's crucial to understand these changes to ensure compliance and to manage your finances efficiently. If you need support in making sense of these changes and how they may impact you, don't hesitate to seek professional guidance.