April 6 2023 marks the start of the new 2023/24 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 2023/24 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 2023/24 tax year it’s £12,570 – the same as it was in the last tax year. This means if you earn or receive less than £12,570 between 6 April 2023 and 5 April 2024, 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. 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 £125,140 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.
Basic rate taxpayer
If you’re a basic rate taxpayer, you pay income tax at a rate of 20%. 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’ll pay a higher rate of tax 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 between £50,271 and £125,140. 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 (four in Scotland).
In Scotland, the threshold for the 41% higher rate of tax is £43,663.
Additional rate taxpayer
If you earn more than £125,140 a year, you currently pay tax at 45% in England, Wales and Northern Ireland. If you live in Scotland, you’ll pay 46%.
Employees pay 12% on earnings between £12,584 and £50,284 in the 2023/24 tax year, which is known as the Primary Threshold and 2% on anything above that, known as the Upper Earnings Limit. These are the same as last year’s thresholds.
If you’re self-employed your Class 4 rates have reduced from 9.71% and 2.73% to 9% and 2% in the 2023/24 tax year.
If you receive the full new State Pension, you will see your annual income increase by £972.40, to £10,600.20 in the 2023/24 tax year. This is a 10.1% increase from last year, in line with September’s inflation figure. If you get the basic State Pension, the maximum you can receive this year is £8,122.40. Read more in our article How the State Pension works.
The Pension Lifetime Allowance, which was at £1,073,100 in 2022/23, has been abolished this year. You can read more about this in What is the pension Lifetime Allowance?
The Pension Annual Allowance has been increased from £40,000 to £60,000 in the 2023/24 tax year. Find out more about pension allowances in our guide How do pension allowances work?
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 professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
The current Inheritance Tax threshold, called the ‘nil-rate band’, is at £325,000 in the 2023/24 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
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.
The annual tax-free capital gains exemption, which stood at £12,300 in the 2022/23 tax year, has been reduced to £6,000 in the 2023/24 tax year. This figure will halve again in the 2024/25 tax year, falling to £3,000.
This is a sharp decrease, and means that many people may have to pay a large amount of tax on their investments. Current capital gains tax rates are 18% and 20% (or 20% 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.
“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.”
The Dividend Allowance, which was first introduced in 2016, has been halved from £2,000 in 2022/23 to £1,000 in the 2023/24 tax year, although the rates have remained the same as last year:
Dividend tax rates 2023/24
|Basic rate||Higher rate||Additional rate|
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 (£1,000 in 2023/24).