Allowances frozen and cut

Mar 21, 2023

It is easy to forget the hidden tax rises which are created by frozen and cut allowances, so here is a quick reminder.

The tax-free personal allowance will be frozen at £12,570 for six years from 2021-22 to 2027-28 and the related marriage allowance is fixed at £1,260 for the same period.

Although income tax rates have not changed, the threshold at which taxpayers start to pay higher rate tax will be frozen at £50,270 for the six years to 2027-28. With inflation running at around 10% this will pull more people into paying 40% tax every year.

The band of income where child benefit is clawed back from the highest earner in the family has been £50,000 to £60,000 since 2013. If your income is within that range or higher and you or your partner receive child benefit, you must declare that benefit on your tax return and some or all of it will be clawed back. An easier solution may be to opt out of receiving child benefit.

The threshold for 45% tax has been cut from £150,000 to £125,140 from 6 April 2023 so be prepared to pay more if your income is within that range.

The capital gains annual exempt amount has been fixed at £12,300 for three years and for most taxpayers this allowance covers modest gains made on their share portfolios. This exemption will be cut to £6,000 on 6 April 2023 and £3,000 on 6 April 2024. As a result many more taxpayers will have to declare their modest capital gains.

Any dividends covered by the dividend allowance escape tax. This allowance has been fixed at £2,000 since 2018-19 but it will be cut to £1,000 for 2023-24 and £500 for 2024-25. Companies whose shares are held by a number of family members who take advantage of this allowance may need to review the dividend strategy for 2023-24 and later years.

Finally the turnover threshold where businesses must register for VAT and start to charge VAT on their sales has been frozen at £85,000 from 2017-18 to 2025-26. It is important to monitor your cumulative sales on a rolling 12-month basis to spot exactly when you exceed the VAT registration threshold.

With these pressures on tax liabilities it is essential that, where possible, we consider the most favourable outcomes for you and your business.

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