New tax year checklist
As the new tax year begins, our guide will help you take full advantage of all the tax breaks available so you don’t pay more than you need to
As world events continue to buffet the economy, the new tax year may not be the first thing on your mind. But using available tax breaks while you have them helps put you in a much more stable financial position for the short and the longer term.
In March 2021, Chancellor Rishi Sunak started repairing the nation’s finances by freezing, until 2026, many tax allowances that would typically go up each year.
In autumn 2021, he announced net tax increases for this year, which, alongside rising inflation and nominal earnings growth, are set to see disposable incomes per person fall by 2.2% this year – the largest fall since records began1.In his spring statement in March, Sunak attempted to address cost-of-living concerns by raising National Insurance thresholds from July 2022.
As the new tax year starts, here is a reminder of the main tax exemptions and allowances, and what has – or hasn’t – changed for this year.
Income Tax and National Insurance
The personal allowance – the amount of income you don’t have to pay tax on – remains at £12,570. The basic rate is still 20%, and the higher-rate threshold, at which you start paying 40%, is £50,270.
Sunak has frozen both these thresholds until 2026. The additional-rate tax threshold, at which you pay 45%, is unchanged at £150,000. There are also changes to the tax bands for Scottish taxpayers.
National Insurance contributions (NICs) are rising by 1.25% this tax year as a Health and Social Care Levy. Most employees will pay National Insurance at 13.25%, taking the total tax from their salaries, including 20% basic rate, to 33.25%.
However, Sunak has also raised the NIC threshold by £3,000 from July 2022, aligning it to the personal income tax allowance at £12,570. He said this would mean around 70% of NIC payers will pay less, despite the Levy2.
Dividend and savings income
Through the Personal Savings Allowance, basic-rate taxpayers can continue to earn £1,000 interest on savings before paying tax in 2022/23. For higher-rate taxpayers, the allowance remains at £500, and for additional-rate taxpayers, it’s zero. The dividend allowance has also remained unchanged at £2,000.
Both allowances have been frozen since 2018/19, limiting the scope to earn tax-free dividend and savings income.
The government has also increased Dividend Tax by 1.25%, which means investors and company directors owning shares in their business will have to pay more on their earnings.
Tax rates on dividends above the allowances
Both the freezing of allowances and the higher Dividend Tax underline the importance of seeking our advice to help maximise the use of your tax allowances, such as in ISAs and pensions. You may wish to review your plans and goals in light of these and other changes.
Despite all the speculation about potential reductions in pensions allowances, they have been left unscathed for this tax year.
Most people can get tax relief on pension contributions up to £40,000 a tax year, or 100% of relevant earnings, if less.
That annual allowance continues to taper down for individuals with an adjusted income above £240,000 and threshold income over £200,000. The minimum reduced annual allowance this year is £4,000.
The lifetime allowance – the most you are allowed in your pension pot before triggering an extra tax charge – usually moves up in line with inflation. However, it stays at £1,073,100 for 2022/23 and will stay frozen until 2026, which could affect many people, even middle earners, over their lifetime.
This makes it even more important to use allowances such as ISAs, in addition to pensions, where you can. For many, it will make financial advice more important too.
The ISA subscription allowance remains at £20,000 for 2022/23, including for Stocks & Shares ISAs and Cash ISAs.
What also remains is the ultra-low interest rates available on Cash ISAs. Though stock-market volatility can be off-putting, investing in shares is likely to remain the best long-term option for ISA savers.
The Junior ISA annual allowance also remains unchanged at £9,000. Alongside children’s pensions, Junior ISAs are a great opportunity to help give children a financial head start. Yet 61% of the £971 million subscribed to Junior ISA accounts in 2019/20 was in cash3.
Parents should reconsider these cash positions given current ultra-low interest rates, especially if it will be several years before your children turn 18 and can access the funds.
The Inheritance Tax (IHT) nil-rate band for 2022/23 remains at £325,000 but has been frozen until 2026. The additional residence nil-rate band, where residences pass to direct descendants, stays at £175,000.
Capital Gains Tax
Sunak has frozen the annual Capital Gains Tax (CGT) exempt amount for individuals at £12,300 until 2026. Effective and repeated use of your CGT annual exempt amount is a great way to transfer assets into ISAs or pensions to shelter from any future tax liability on income or gains.
Many have been expecting the government to announce significant reforms to IHT and CGT, but it said last November that it would not go ahead with these. This brings more certainty to planning, so now may be a good time to take advantage of CGT allowances and IHT planning before the government changes its mind.
The main Corporation Tax rate will remain at 19% for the year 2022/23. For businesses with profits of £250,000 and over, the rate will rise to 25% from April 2023. Then the rate for businesses with £50,000 profit or less will stay at 19%, and there will be a marginal taper for those with profits between £50,000 and £250,000.
An investment in a Stocks & Shares ISA will not provide the same security of capital associated with a Cash ISA or a deposit with a bank or building society.
The bases, levels and reliefs from taxation can change at any time and depend on individual circumstances.
1 Economic and fiscal outlook, Office for Budget Responsibility, March 2022
2 Spring Statement 2022, HM Treasury, March 2022
3 Commentary for annual savings statistics, Gov.uk, June 2021