April 6 2022 marks the start of the new 2022/23 tax year, when various changes come into effect that could have an impact on your finances.

Here, we explain how tax allowances and thresholds work, what they are for the new 2022/23 tax year, and how they could affect you.

Personal tax allowance

Your personal tax allowance is the amount of money you can earn, or income you can receive, without paying tax. In the tax year 2022/23 it’s £12,570 – the same as it was in the 2021/22 tax year. This means if you earn or receive less than £12,570 between 6 April 2022 and 5 April 2023, you won’t have to pay any tax.

Your income could include rental income, wages or earnings from freelance work, interest from savings and/or dividends from shares or investment funds you own.

Not all the money you receive is taxable. So that means you could receive more than £12,570 a year and still not pay tax.

Here’s a list of income that you could have to pay tax on:

  • Your wages if you’re employed, or profits from being self employed
  • Interest from savings accounts, over a certain amount
  • Dividends from shares, over a certain amount (a dividend is a share of the profit that a company makes)
  • Pension payments, including your state pension
  • Certain state benefits, including Jobseeker’s Allowance and Carer’s Allowance.

Once you earn more than £100,000, you start to lose the personal allowance. You lose it at a rate of £1 for every £2 you earn above the £100,000 threshold. This means if you earn £110,000 a year you get a personal allowance of £7,500 a year.

If you earn £120,000 a year, you get a personal allowance of £2,500 a year. And once you earn over £125,000 a year, you don’t get the personal allowance at all.

Starting rate for savings

If you’re on a low income, you can also earn interest tax-free through the starting rate for savings. It’s an allowance that means you can receive up to £5,000 a year in savings interest without paying tax. However, every £1 you receive from income sources that aren’t savings reduces your starting rate allowance by £1. This means that If you earn less than £18,570 a year from income and savings interest, your savings interest won’t be tax-free.

The easiest way to explain this is through an example. If you earn £12,570 a year and receive £4,000 a year in interest from your savings (which would mean you have a lot of savings!) you wouldn’t pay any tax. That’s because you would qualify for the full savings starting rate of £5,000 and, if you’re a basic rate taxpayer, you’ll also benefit from the personal savings allowance which enables you to earn £1,000 in interest tax free.

This means that if you were to earn £15,500 a year and receive £2,999 a year in savings interest, so your annual income would be £18,499, you would still be able to get interest on your savings tax free. But if you were to earn £16,000 a year and get £2,999 a year in savings interest, you wouldn’t qualify for the savings starter rate, as you’d have exceeded your limit for tax-free savings.

Income tax

Basic rate taxpayer

If you’re a basic rate taxpayer, you pay income tax at a rate of 20%, although the Government has announced plans to cut this to 19% by 2024. You only pay that on your income or earnings above £12,570, not on the whole lot.

You pay this rate if you live in England, Wales and Northern Ireland. Scotland sets its own income tax thresholds and rates. Its personal allowance is the same as England, Wales and Northern Ireland, at £12,570, but it has a lower rate of income tax of 19% on money you earn between £12,571 and £14,732. This rate is called the starter rate.

In Scotland, you pay tax at the basic rate (20%) on earnings or income above £14,733 and below £25,688.

Higher rate taxpayer

You pay a higher rate of tax than 20% on money you earn or receive over a certain threshold. The threshold depends on where in the UK you live. In Scotland, There’s an intermediate rate of tax of 21% on earnings between £25,689 and £43,662.

In England, Wales and Northern Ireland, you pay tax at 40% on money you earn or receive over £50,271. You only pay tax at 40% on that part of your income. If you’re a ‘higher rate taxpayer’, you actually pay tax at two different rates.

In Scotland, the threshold for the 41% higher rate of tax is £43,663.

Additional rate taxpayer

If you earn more than £150,000 a year, you pay tax at 45% in England, Wales and Northern Ireland and 46% in Scotland.

National Insurance

Employees used to pay 12% on earnings up to £50,270 in the 2021/22 tax year and 2% on anything above that, but this has risen to 13.25% and 3.25% respectively in the 2022/23 tax year. If you’re self-employed your rates have increased from 9% and 2% to 10.25% and 3.25%.

The threshold at which employees start to pay National Insurance contributions has risen from £9,568 to £9,880 at the start of the 2022/23 tax year, and it will increase again to £12,570 in July, bringing it in line with the income tax personal allowance.

Pensions

If you receive the full new State Pension, you will see your annual income increase by £289.50, to £9,628.50 in the 2022/23 tax year. Read more about how the State Pension works in our article How the State Pension works. Pension and savings allowances will remain unchanged.

The Pension Lifetime Allowance, which was at £1,073,100 in 2021/2022, remains unchanged in the 2022/23 tax year as it has been frozen until 2026. The Pension Annual Allowance also remains unchanged at £40,000 in the 2022/23 tax year. Find out more about pension allowances in our guide How do pension allowances work?

If you’re close to exceeding the Lifetime Allowance, you may want to seek advice from a qualified financial adviser. Some people suggest reducing returns on your pension savings, for example, by moving your money into lower risk, lower return cash holdings so you don’t breach the limit. Others choose to look at other tax efficient saving opportunities such as ISAs, or even Venture Capital Trusts and EIS investments into smaller companies. It’s a highly complex area however, where it will almost certainly pay to get tailored professional advice for your personal circumstances in order to avoid falling foul of the rules and incurring a hefty tax charge.

If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service. You may also want to get in touch with the Pensions Advisory Service.

However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.

If you’re considering getting financial advice and are looking for somewhere to start, Rest Less Pensions are offering a free Pension Health Check with one of their experts. They can offer you information and guidance on the call and at the end will discuss whether you would benefit from paying for professional financial advice. Capital at risk.

Inheritance Tax

The current Inheritance Tax threshold, called the ‘nil-rate band’, is at £325,000 in the 2022/23 tax year, unchanged from the previous year. It has stood at this level since April 2009, and will continue to be frozen at this level until 2026, seeing more people paying this tax on death, if property prices continue to rise.

There are things you may be able to do to reduce the amount of Inheritance Tax you pay. For example, you can give away up to £3,000 each tax year without this money being subject to your estate for Inheritance Tax purposes. If you’re married or in a civil partnership, you can make as many gifts to your spouse or partner as you want during your lifetime, free from IHT. Read more in our article Which gifts are exempt from Inheritance Tax?

Other ways you might be able to reduce your liability to Inheritance Tax include taking out a life insurance policy that’s written in trust. Find out more in our article Six ways to reduce inheritance tax. Bear in mind, though, that some of these options may not be suitable for you, so you should seek professional financial advice if you’re looking for specific recommendations based on your personal circumstances. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guide How to find the right financial advisor for you.

Capital Gains Tax

The annual tax-free capital gains exemption, which stood at £12,300 in the 2021/22 tax year, remains at this level in the 2022/23 tax year. This allowance is essentially the amount of profit you can make (minus certain costs) from selling assets, such as investments or a property you let out, before you have to pay capital gains tax.

Current capital gains tax rates are 10% and 20% (or 18% and 28% for property).

Jason Hollands, managing director at investing platform Bestinvest, said: “Regular disposals of investments each year to take advantage of the annual capital gains tax exemption can protect you against a hefty future CGT bill when you come to dispose of an investment, the profits on which might take you over the annual £12,300 allowance.

“If you are married or in a civil partnership, then inter-spousal transfers can be used to make sure both partners’ allowances are used optimally. When shares, for instance, are transferred from one spouse to another, it is assumed they are given at cost value and therefore don’t trigger a tax liability. The CGT allowance for that year of the spouse who receives the transfer then comes into play.”

Dividends

The Dividend Allowance, which was first introduced in 2016, has already been cut from £5,000 to £2,000. The rate of this tax has risen by 1.25 percentage points from April 6 2022. The new rates are shown below:

Basic rateHigher rateAdditional rate
8.75%33.75%39.35%

Source: Gov.uk

You’ll pay dividend tax if you receive dividend income from shares, which falls outside of your personal allowance (£12,570 in 2022-23) and the dividend allowance (£2,000 in 2022-23). The government claims most investors won’t be affected by this year’s change, as shares held in individual savings accounts (ISAs) are not subject to dividend tax.

However, basic rate taxpayers who are affected by the changes to dividend tax are expected to pay, on average, an additional £150 on their dividend income in 2022-23, whilst higher rate taxpayers are likely to have to fork out an additional £403 on their dividend income.

Do you take notice of tax changes at the beginning of the new tax year? How will they affect you? We’d be interested to hear from you. You can join the money conversation on the Rest Less Community forum or leave a comment below.

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