In the autumn statement, the chancellor outlined a range of measures that will likely affect many of your clients in 2023.
In a sharp U-turn from his predecessor, Jeremy Hunt took steps that will increase the tax burden on individuals in the years to come, including a reduction in some key tax thresholds and allowances.
The changes will likely affect any of your clients who make profits from selling assets, receive dividends, or earn more than £125,140 a year.
Here are three important measures that will affect your high-earning clients in 2023 and beyond.
1. Reduction in the Capital Gains Tax annual exempt amount
Individuals pay Capital Gains Tax (CGT) on the profits they make from selling or otherwise disposing of assets such as non-ISA investments, second homes, and things like art and antiques.
In 2022/23, each individual has an “annual exempt amount” of £12,300. This means a client can make a gain of up to £12,300 before any CGT would typically be due. Couples can combine their exemption and make gains of up to £24,600 in the 2022/23 tax year.
In the autumn statement, the chancellor announced the annual exempt amount would fall to £6,000 in April 2023 and then to £3,000 in April 2024.
The result of this is that more of a client’s profits will be subject to CGT in future tax years. The current tax rates are:
- Basic rate: 10% (18% for residential property)
- Higher rate: 20% (28% for residential property)
Clients should think carefully about crystallising some gains before the end of the 2022/23 tax year in order to make the most of the current annual exempt amount of £12,300.
Additionally, saving into tax-efficient ISA investments could become even more prudent, as profits on an ISA are not subject to Income Tax or CGT.
2. Reduction in the Dividend Allowance
Along with the reduction in the CGT annual exempt amount, Jeremy Hunt announced that the Dividend Allowance – the amount of dividends an individual can receive before paying Dividend Tax – would also reduce in 2023 and 2024.
The allowance will be reduced from £2,000 to £1,000 in April 2023, and then to £500 in April 2024.
Anyone who receives income from dividends – for example, your business owner clients who take a lower salary and higher dividend payments – will likely pay more tax on their dividends from April 2023.
The rates of Dividend Tax are:
- Basic rate: 8.75%
- Higher rate: 33.75%
- Additional rate: 39.35%
This two-stage reduction in the Dividend Allowance will mean more of your clients’ dividend payments will likely be subject to tax from 2023/24. Consequently, making the most of the Dividend Allowance before it reduces in April 2023 could be a prudent step.
3. A lower additional-tax rate threshold
In the quickly abandoned mini-Budget in September, then-chancellor Kwasi Kwarteng announced the abolition of the 45% additional-rate tax band.
In a complete reversal, Jeremy Hunt announced in his autumn statement that as well as reinstating the top rate of Income Tax, more people will pay 45% tax from April 2023.
The threshold at which additional-rate tax will be payable will fall from £150,000 to £125,140 from the 2023/24 tax year.
So, any client with earnings above £125,140 will pay more Income Tax from 6 April 2023. An individual earning more than £150,000 will pay around an additional £1,200 in Income Tax each year as a result of this change.
Even clients who earn less than the additional-rate threshold will likely pay more tax over the coming years. With Income Tax thresholds such as the Personal Allowance frozen (rather than rising in line with inflation), clients will likely see a greater proportion of their earnings taxed at 40% and 45% as their salaries/earnings increase over the next few years.
Get in touch
These three changes will likely increase the tax burden on your high-earning clients. If they would benefit from a financial review to determine how they could save more tax-efficiently – for example, through increased pension contributions – please get in touch and we’d be delighted to help.
Email email@example.com or call 01454 416653.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.