Advisers’ guide to tectonic tax shifts

The recent autumn statement announcement has meant taxes have hit the headlines once again. Tax rules change all the time and some of them change relatively unnoticed. But with the turmoil caused by the previous ‘mini-budget’, all eyes were on the autumn statement to find out how the new tax rules would affect us.

But as everyone’s circumstances are different, that’s not an easy question to answer. In some cases though, a change in tax rules can mean a big shift either towards or away from your goals.

A number of clients come to us looking for ways to save tax. When taxes aren’t predicted to change much (though we can never be sure), we have time on our side. But after the autumn statement, we know some of the changes coming our way and time is of the essence to take advantage of current tax rules before they change.

Here’s a closer look at the tax benefits currently available and what acting now could mean for meeting any financial goals.

This article isn’t personal advice. ISA, pension, and tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for your circumstances, ask for financial advice. Unlike the security of cash, investments can fall and rise in value so you get back less than you invest. Remember, Scottish tax bands and rates of tax are different.

Some incoming changes

• Income tax personal allowance and inheritance tax (IHT) thresholds frozen for two more years, so will now remain static until April 2028.
• Income tax additional-rate threshold reduced from £150,000 to £125,140 from April 2023.
• Dividend allowance to be cut from £2,000 to £1,000 in April next year and then reduced to £500 from April 2024.
• Capital gains tax (CGT) annual exemption will drop from £12,300 to £6,000 from April 2023. It will then drop to £3,000 from April 2024 onwards.

What these changes mean for you will depend on your personal circumstances. But what’s clear is that over the next couple of years, less wealth will be exempt from tax.

That will happen in two ways.

Those already in a particular tax band will have more of their income subject to tax. Others will move into a tax bracket. This is either because it’s been lowered or because it’s remained frozen enough for things like pay rises or investment growth to nudge them into a higher tax bracket.

Wealth exempt from tax over the next few years

Scroll across to see the full chart.

This chart is for illustrative purposes only. Your eligibility for and the amount you’re entitled to for the Personal Allowance, Starting Rate for Savings and Personal Savings Allowance depends on your personal circumstances.

This chart shows quite a large drop in tax exempt personal wealth between 2022 and 2023. Then another smaller, but not insignificant, drop between 2023 and 2024. And this is without including the lowering of the additional-rate tax threshold.

Using your current allowances for as long as possible and having a strategy for when the rules change could be crucial for meeting your financial goals. Financial advice could help you understand the rules and the ways in which you could save tax.

More on financial planning

Our advisers are experts in tax-efficient financial planning but your adviser may suggest that you speak to a lawyer or accountant to complement their advice in the case of specific or complex circumstances.

Tax saving ‘vehicles’

Pensions

By making personal pension contributions, you can benefit from tax relief. Your contributions could also help bring you back below a tax threshold.

Pension contributions made by a basic-rate taxpayer could benefit from tax relief of 20%. For higher-rate and additional-rate taxpayers, the tax benefits can be even greater. You could also be able to reclaim a further 20% or 25% – this depends on the level of your income within the higher and additional-rate tax bands.

Paying into your pension can mean more of your wealth will sit outside your taxable estate when it comes to inheritance tax. Though the rules around this are complicated, so ask us about inheritance tax advice if you’re unsure.

Remember, you can’t normally access your pension until at least 55 (rising to 57 by 2028).

If you’re planning to contribute more to your pension to take advantage of tax relief, keep an eye on how close you are to your annual pension allowance. This is currently £40,000 for most people. But there are three notable exceptions:

• If you earn less than £40,000 per year you can only receive tax relief on contributions up to the amount you earn.
• If you’re considered a high earner and subject to the tapered annual allowance.
• If you’ve already flexibly accessed your pension.

To get an idea of how much tax relief you could currently get, use our tax relief calculator.

Try our tax relief calculator

However, if you’re eligible, you can contribute more than the annual allowance by using unused allowance carry forward from up to three previous tax years.

Carry forward calculator

ISAs

Changes to the dividend allowance and capital gains tax (CGT) were central to the recent autumn statement.

When you invest in an ISA, dividends and capital gains aren’t subject to UK tax.

Not only are they tax efficient, ISAs can also form a vital part of your financial plans. There are different types of ISAs to help you reach a range of goals.

Whether you’re using a Lifetime ISA to complement your pension, a Junior ISA for your children’s future, or a Cash ISA for a rainy day, using ISA allowances can help you reach your goals. Remember, your ISA allowance is £20,000 per tax year. You can choose to split that allowance across one of each different type of ISA (though a maximum of £4000 in a Lifetime ISA if you’re eligible). Children have their own ISA allowance of £9,000.

Unlike your pension allowance, you can’t carry forward your ISA allowance. You should consider whether using more of it before tax year end on 5 April is right for you.

Need more help with saving tax?

If you’d like an expert on financial planning to help you make the most of your tax allowances, you’re in the right place. We’re dedicated to helping clients achieve peace of mind by having a sound financial plan in place.

It starts with booking a call with our advisory helpdesk. If it looks like taking advice is right for you, we’ll book your free initial consultation with one of our financial advisers. We’ll discuss your options with no pressure to take advice.

If, having heard what advice can offer, you decide to go ahead, there will be a charge which we can discuss with you in the initial consultation.

We can only provide advice to UK residents. If you’re resident overseas, unfortunately we’re unable to advise you.

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