One of the most widely trailed announcements was the reduction of the income tax additional rate threshold. This threshold, above which the 45% rate (39.35% for dividend income) applies, will fall from £150,000 to £125,140 from 6 April 2023. This means that the additional rate now applies from the point at which an individual’s income tax personal allowance is fully restricted. The threshold is therefore expected to increase in line with future increases to the personal allowance, which is also frozen until April 2028.
Individuals at risk of being brought above the additional-rate threshold could explore the merits of making additional pension contributions and, among other workplace benefits, entering salary and/or bonus sacrifice arrangements to manage their level of taxable income exceeding £100,000.
You can read our article commenting on the increased value of pension allowances and reliefs following these changes here.
Capital gains tax and dividend allowance
Investors and landowners will be relieved that there has been no change to the headline rates of capital gains tax, but the capital gains tax annual exempt amount will more than halve to £6,000 from April 2023 and halve again to £3,000 from April 2024. The dividend allowance will also halve from April 2023 to £1,000 and to £500 from April 2024.
The effects of these changes are likely to be felt most keenly by taxpayers with moderate levels of investment income and capital gains or employees participating in company share schemes. These individuals may not previously have been required to file tax returns and pay tax on their modest investment returns, as the dividends and capital gains would have been covered by tax-free allowances. It will now be necessary for affected individuals to ensure they review whether or not they have an obligation to register for and file self-assessment tax returns.
The combination of changes adds greater importance to individuals taking full advantage of their annual ISA allowances. An individual can currently contribute £20,000 per annum to an ISA and future investment income and growth is not subject to income tax or capital gains tax.
Inheritance tax (IHT)
The IHT nil-rate band (NRB) was increased to £325,000 from 6 April 2009 and it has remained at this level since. It has been announced that the NRB will remain frozen for a further five years until April 2028. The almost twenty-year freeze in the NRB, coupled with inflationary growth of asset values, will see many families with moderate levels of wealth being drawn into the IHT net.
Families that find they are being dragged above the IHT threshold may wish to consider taking relatively easy steps to manage their exposure by considering the availability of IHT reliefs, making lifetime gifts and reviewing their wills.
The residence nil-rate band, which effectively extends the NRB for qualifying estates when a home is left to a direct descendent, will also remain frozen at £175,000. The downward tapering of the allowance will continue to start for estates valued above £2 million. This complex, narrowly targeted and poorly understood tax relief has added significant complexity for families and friends dealing with estates, particularly where an elderly relative has sold the home to move into longer-term care.
Stamp duty land tax (SDLT)
One measure announced at the ‘mini Budget’ in September, which has survived the subsequent political and economic fallout, was the doubling of the threshold above which SDLT is due on a property purchase. This increased the threshold for existing homeowners to £250,000. The increased threshold for first-time buyers also remains and that now stands at £425,000. It applies for properties purchased up to a value of £625,000.
While the original measure was not subject to an end date, it has been confirmed that the SDLT reduction is only a temporary measure and will apply until 31 March 2025. You can read more in our article here.
These measures do not apply to Scotland and Wales, as they charge separate land transaction taxes.
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