A year marked by several tax changes that impacted higher-rate taxpayers

As we approach the end of the year, taxpayers should begin assessing their tax obligations. This is not a task to be left to the eleventh hour, especially considering tax changes coming into effect in 2024.

This is also particularly true for 2023, a year already marked by several tax changes that impact higher-rate taxpayers. By understanding your tax obligations early on, you could avoid unwelcome surprises. Understanding these tax changes lets you plan and strategise effectively to meet your tax obligations without unnecessary stress or last-minute surprises. Remember, proactive tax planning can help you optimise your finances and potentially reduce your tax liability.

Tax changes and their impact
In the 2023/24 tax year, the threshold for taxpayers in England, Wales, and Northern Ireland paying the top tax rate of 45% has been reduced from £150,000 to £125,140. This figure aligns with taxpayers earning over £100,000, who lose all of their personal allowance. Scottish taxpayers face a similar situation, but the tax rate has increased to 47%.
Capital Gains Tax (CGT) allowances and dividend allowances have also been slashed. The annual exempt amount for CGT has dropped from £12,300 to £6,000 for this tax year and will further decrease to £3,000 from April 2024. Similarly, the dividend allowance has been cut from £2,000 to £1,000, with another £500 reduction planned for April 2024.

Strategies for mitigating tax rises
The challenge for all is devising ways to counteract these tax increases. Here are some strategies for those likely to become additional rate taxpayers due to the threshold reduction, if applicable.

Charitable donations
The tax system encourages generosity by providing tax relief on charitable donations. You won’t have to pay CGT on land, property, or shares donated to charity. By deducting the value of your donation from your total taxable income, you can also pay less income tax.

Selling shares
With the CGT allowance set to decrease further in the next tax year, it might be worth considering selling stocks that have gained value. However, investment decisions should align with your goals and objectives rather than purely tax breaks.

Defer tax with investment bonds
Offshore investment bonds can provide cash in the form of capital payments, deferring tax on growth. The trade-off is that the growth will be subject to Income Tax rather than CGT when the bond matures.

Boost pension contributions
Pension contributions can reduce taxable income levels. If your earnings surpass £125,140, every £55 contributed to a pension will yield £100 of investment. How you receive the tax relief depends on whether you’re employed or self-employed. However, it’s essential to have enough ‘earned’ income to cover the gross contribution.

Investment splitting
Splitting investment portfolios between spouses or partners allows you to use both CGT allowances and lower rate bands. Gifting investments to a non-earning spouse or partner can ensure their allowances aren’t wasted.

Restructure company dividends
Company owners might consider restructuring dividends to retain their personal allowance every other year. This approach requires careful planning and discipline to retain enough cash each high-income year.

Family investment companies
Family investment companies can serve as a longer-term wealth accumulation structure. Although the corporation tax rate has increased to 25%, dividends received by a company are not subject to tax, allowing for potential gross roll-ups of income.

THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. YOUR OWN PERSONAL CIRCUMSTANCES, INCLUDING WHERE YOU LIVE IN THE UK, WILL HAVE AN IMPACT ON THE TAX YOU PAY. LAWS AND TAX RULES MAY CHANGE IN THE FUTURE. SEEK PROFESSIONAL ADVICE.