Earlier this month, The Chancellor confirmed that headline rates of income tax and capital gains tax (CGT) will remain at their current levels. However, there were various reductions in key thresholds and allowances.
For income tax, the additional rate threshold is being reduced to £125,140 from 6th April 2023. The personal allowance is reduced by £1 for every £2 earned over £100,000 and is fully withdrawn once an individual’s income reaches £125,140. The additional 45% main rate and 39.35% dividend rates of tax will apply to income above this level.
The dividend allowance is being halved from its current £2,000 to £1,000 from 6th April 2023. It will be halved again to £500 from 6th April 2024. Dividends received above this level will be subject to the higher dividend rates that were introduced from 6th April2022 and continue to apply (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers).
The CGT annual exempt amount is being cut from its current £12,300 level to £6,000 from 6th April 2023, and to £3,000 from 6th April 2024. This, combined with the reduction in dividend allowance, will mean that a larger amount of investment income and gains will become subject to tax.
Additionally, several allowances and thresholds will be frozen at their current levels until April 2028. This includes the income tax personal allowance (£12,570), national insurance contributions (NIC) thresholds (various), the inheritance tax nil rate band (£325,000) and residence nil rate band (£175,000).
In the context of recent wage inflation and high house price growth, this will mean that more individuals and estates will be dragged into paying tax.
National living wage and national minimum wage
The national living wage hourly rate will increase to £10.42 per hour from 1st April 2023 for those aged 23 and over – an increase of 9.7%. This represents an increase of over £1,600 to the annual earnings of a full-time worker on the national living wage and is expected to benefit over 2m low-paid workers.
The VAT registration threshold, the level of turnover at which businesses are required to register for VAT, will also be maintained at £85,000 until 1st April 2026. By that time, the threshold will have been frozen for nine years. However, at £85,000, it remains more than double the EU average.
