A series of tax hikes and freezing of allowances from April 6 are likely to place further pressure on our finances, but there are steps you may be able to take to reduce the burden.
The cost of living crisis is already making it difficult for many of us to make ends meet, with the price of food, energy and other essential costs soaring in the past year. Meanwhile, Council Tax rises and a hike in National Insurance, among other tax changes, will soon come into force.
Here we take a look at some of the taxes that increased from April 6 – and what you might be able to do to minimise the impact of these on your finances.
1. Dividend allowance reduction
The tax-free dividend allowance has fallen from £2,000 to £1,000 in the 2023/24 tax year, and will fall again to £500 from April 2024. If you receive more than your tax-free allowance in dividends in the tax year outside an ISA, you’ll pay tax on this income. The current dividend tax rates are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayer
What can you do about it?
Any dividends you receive on investments held within an ISA are tax-free, so if possible, it’s worth making use of your stocks and shares ISA allowance.
The ISA allowance for the current 2023/24 tax year stands at £20,000, and you get a new allowance at the start of each new tax year from April 6. It’s a case of use it or lose it with your ISA allowance, as you cannot carry it over into the next tax year. Investments held in an ISA are also free from Capital Gains Tax (CGT) when you sell them, whilst returns are free from income tax. Read more in our article Everything you need to know about ISAs.
If you’re looking to invest in an ISA, fund platforms such as Fidelity, Hargreaves Lansdown and AJ Bell can help narrow down your choices with recommended fund lists, which might highlight 50 funds out of the 3,000 plus available to UK savers. They also offer ready-made funds for a range of different risk profiles if you don’t want to pick investments yourself. Bear in mind that there are charges associated with stocks and shares ISAs and you’ll pay a fee to the platform as well as for the funds held.
Dividends received within a pension are also free from tax, and any pension contributions benefit from tax relief at your marginal rate, too. However, pension withdrawals above the 25% tax-free cash lump sum are taxed as income.
If you’re married or in a civil partnership, you may be able to reduce your dividend tax bill by investing as a couple. For example, if you are a higher rate taxpayer, it makes sense to hold income-producing investments in your partner’s name, if they are a basic rate taxpayer, to reduce your tax liability.
2. Frozen National Insurance thresholds
The National Insurance increase was reversed in November 2022. Meanwhile, the new 1.25% ‘Health and Social Care Levy’ due to come into effect from April was cancelled. Read more in our article National Insurance hike scrapped.
However, the government is still freezing the NI thresholds from April 2023 to April 2028. This effectively means a tax rise for both employees and employers, particularly as salaries are expected to rise over this period.
What can you do about it?
You may be able to reduce the impact of National Insurance on your earnings by making a pension contribution through a salary sacrifice arrangement.
While you won’t increase your take home pay by doing this, you can reduce your tax bill this way. Salary sacrifice is when you agree to forgo part of your salary in return for extra benefits from your employer, such as additional pension contributions or a company car. Learn more in our guide What is salary sacrifice?
This year you can pay up to £40,000 into your pension and still benefit from tax relief. You are also able to carry forward unused annual allowances from up to three previous tax years, under carry forward rules. Find out how these rules work in our article Pension carry forward explained.
Depending on your personal situation and employment status, using the carry forward rule can be complicated and you may need the help of a tax and/or a professional financial adviser. If you want help from an accountant, you can find a qualified chartered accountant in your local area using the Institute of Chartered Accountants in England and Wales’ (ICAEW) directory of chartered accountants.
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.
3. Council tax rise
Councils can choose to raise this tax by 5% without holding a referendum, the Chancellor announced in last year’s Autumn Budget, in order to meet care funding shortfalls. This means that someone in Council Tax band D, for example, could see their council tax bills rise from an average of £1,966 a year to more than £2,000.
Check how much your council tax is increasing by finding your local council, if you don’t already know what this is, using the Gov.uk tool, and look at its website. Check your latest bill to find out which council tax band your home falls under – these range from A to H.
What can you do about it?
You’re sent a council tax bill every April which details how much you’ll pay, and usually payments are spread over a period of 10 months. However, you can choose to pay over 12 months to reduce your monthly payments.
You may be able to claim a reduction in your council tax bill ranging from 25% to 100% if you live alone, you’re claiming certain benefits, on a low income, or have caring responsibilities. You can find out more from your local authority and apply to them directly for a council tax reduction. See if you’re eligible and find out more about how to apply at Gov.uk.
Find out more about ways you might be able to reduce your council tax in our guide 6 ways you might be able to save money on your Council Tax.
4. Income tax thresholds frozen
Most people will pay more income tax from April, due to the freezing of tax allowances and what is known as ‘fiscal drag’. This essentially means the process by which people end up paying more tax over time as they earn more and their assets increase in value, while tax rates are frozen.
The amount you can earn before paying tax is called your Personal Allowance, and currently stands at £12,570. This has been frozen at this level, along with the higher rate threshold at £50,270, until the tax year 2025/26. If you earn more than £150,000 a year, you pay additional rate tax at 45% in England, Wales and Northern Ireland, and this will be reduced to £125,140 from April. As a result, more people will be pushed into higher rate tax brackets as their salaries rise, and increase the amount of tax the government receives.
What can you do about it?
It’s worth checking you’re on the right tax code, as you can get a refund of income tax payments if you’ve paid too much. Sometimes new employees are put on emergency tax codes when they change jobs, meaning they’ll be charged at a higher rate. You can use the government’s online tool to work out how much income tax you should be paying. You may be due a refund, you can apply for this here.
If you’re married, you could use the Marriage Allowance to reduce the overall amount of tax you pay. You may be able to transfer up to 10% of your personal allowance to your partner. The personal allowance is £12,570 in the 2023/24 tax year, which means you can transfer £1,257. This gives your partner an increased personal allowance, and reduces their tax bill. You can also backdate your claim to any tax year since April, 2017. Find out more about this allowance and whether you might be eligible in our article Marriage Allowance explained.
You may still be able to reclaim tax if you’ve spent any time working from home over the past year. The amount you can get depends on the rate of tax you pay. For example, basic rate taxpayers can claim tax relief on £6 a week, amounting to £1.20 a week (20% of £6), or £62.40 a year. Higher rate taxpayers can claim £2.40 a week, or 40% of £6 a week, which amounts to £124.80 a year. You can find out more about the scheme in our article Claim tax relief if you’re working from home.
5. Inheritance Tax threshold frozen
The current Inheritance Tax threshold, called the ‘nil-rate band’, will remain frozen at £325,000. It has stood at this level since April 2009, and any assets over and above this amount are usually subject to tax at 40%. There’s also a main residence allowance. This allowance applies in addition to the existing nil rate band, but only where the person who has died is transferring a property that was once their home, to their direct descendants (i.e. children or grandchildren). The residence nil-rate band is currently £175,000, having increased to this limit in April 2020.
These thresholds will continue to be frozen at this level until at least 2026, seeing more people paying this tax on death, as property prices in particular continue to rise. Find out more in our guide Understanding Inheritance Tax.
What can you do about it?
You can take some simple steps 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 articles 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. Read more in our article Six ways to reduce Inheritance Tax bills. 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.
6. Capital Gains Tax on buy to let
Rising property prices mean that people who are selling a buy to let or second property after April are likely to be subject to higher Capital Gains Tax (CGT) bills. Average house prices have risen by more than £50,000 since the start of 2020, according to Halifax.
The annual exemption for gains on sale more than halved to £6,000 from £12,300 at the start of the 2023/24 tax year on 6 April, and will fall to £3,000 from April 2024. This is the amount you can make in profits before you pay tax on gains from selling an asset. Tax rates remain at 18% on any profits above your allowance, rising to 28% if you’re a higher rate taxpayer. Read more in our article How is my buy to let property taxed?
What can you do about it?
You get tax relief for the years you lived in the property as a main residence, and for the final nine months prior to sale. You can also deduct certain costs from any gain on sale, including estate agents’ and solicitors’ fees, stamp duty paid when the property was bought, survey and valuation costs and some costs for home improvements.
Some landlords are reducing the amount of tax they pay on a buy to let property by owning the property through a limited company. Gains made selling properties through a limited company are subject to corporation tax, at 19%, which is far less than the higher rate of CGT at 28%. Read more in our article Should I own my buy to let property through a limited company? However, taking this route can have significant downsides too, so it’s worth seeking professional advice first to make sure this is the right course of action for you. Bear in mind that a good accountant or financial adviser may also be able to help you find ways to reduce your liability to CGT on sale of a buy to let property.
How to reduce your outgoings
Rising taxes are just some of the ways your finances will be squeezed over the next financial year.
The cost of everything from clothing to petrol is rising, and placing our finances under huge strain. Many of us will be looking at how to save money to help make ends meet. You can find plenty of tips in our article How to save money – 21 money saving tips.
In particular, energy bills have soared in the past year, and will rise again in April when the government’s energy rebate comes to an end. Read more about what’s happening with energy bills in our article What is the difference between the energy price cap and the Energy Price Guarantee? However, there are ways you might be able to reduce your usage, or get help with your bills. Read more in our articles The energy bills crisis: What can you do about soaring costs? and Energy saving tips: how to reduce your bills and Are you eligible for help with heating costs?
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