April 2023 tax changes at a glance
- Increased income tax for higher incomes
- Dividend payment reduction
- Frozen tax rates
- They froze national insurance rates until April 2028
- Reduced annual capital gains tax exemption amount
- Frozen assets tax thresholds
- Increase in corporate tax
Increased income tax for higher incomes
The additional rate threshold (ART) for income tax has been reduced from £150,000 to £125,140 from 6 April 2023. This means that more taxpayers will pay income tax at the top rate of 45% when their income exceeds £125,140.
The new threshold will apply to taxpayers in England, Wales and Northern Ireland.
Higher earners in Scotland will also pay more tax from April 2023. As announced inScottish Budget, the highest tax bracket in Scotland will also fall from £150,000 to £125,140. Scottish taxpayers will also pay income tax at the highest rate from April 2023 when their income exceeds £125,140.
In Scotland, the top and top rates of income tax will also increase by 1p respectively from April 2023. The top rate will rise to 42% and the top rate will rise to 47% for Scottish taxpayers. The higher and additional rates for the rest of the UK remain at 40% and 45%.
Tax tip - consider tax-efficient retirement savings
Higher rate taxpayers will face two tax pitfalls from April 2023:
- If the income exceeds £125,140, you will pay the additional rate of income tax, which is 45% (47% in Scotland).
- Also, if your income is between £100,000 and £125,140, you will be subject to an effective tax rate of around 60%. This is because, once your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 you exceed the £100,000 tax bracket.
You may be able to reduce your tax exposure by making it personalpension contributionsand charitable donations.
For a basic rate taxpayer looking to save £100 in their personal pension scheme, the real cost is just £80. For a higher rate taxpayer, saving £100 could actually cost just £60 (£58 in Scotland). The cost is further reduced to just £55 (£53 in Scotland) for an additional taxpayer.
While potentially extremely tax efficient, there are a few pitfalls to be aware of before taking action. Importantly, the amount that can be saved for a personal pension is limited, so you should check your position before taking any action.
You may also need to seek investment advice from a qualified financial advisor. We can introduce youFinancial services from TaxAssistwho can advise you on all aspects of your financial affairs, including independent advice on pensions and retirement planning.
Dividend payment reduction
Individuals have a dividend deduction each year, meaning they only pay tax on dividend income above this dividend deduction.
The dividend payment will be reduced from £2,000 to £1,000 from April 2023 and to £500 from April 2024. The amount of tax you pay on dividends in excess of the dividend payment will depend on your tax bracket and the following rates will apply from April 2023:
|Basic taxpayer rate||8,75%|
|Additional taxpayer rate||39,35%|
Tax advice - make sure your rewards strategy is tax efficient
Recipients of dividend investment income and business owners who derive dividend income will now face higher taxes as a result of the reduced compensation.
For business owners, review your compensation strategy and talk to your accountant to make sure the way you get your return on investment is being done as efficiently as possible.
Frozen tax rates
Freezing many tax credits until 2028 means low-income taxpayers will also pay more in taxes as inflation rises. The £12,570 personal income tax credit has been frozen until 2028 and this will affect basic rate taxpayers as a higher proportion of your income will actually be subject to tax.
Tax advice – can wealth transfer improve your tax position?
It is possible to gift (part of) your income-producing assets that you own to your spouse or civil partner and save tax. Generally, for this to work, your gift to your spouse or common-law partner must be an unconditional gift. You should always seek professional advice so that your individual circumstances can be assessed before action is taken.
Basic rate taxpayers may also be able to transfer £1,260 of their unused personal allowance to their spouse or civil partner to save tax. This only applies if neither of you has a higher tax liability.
They froze national insurance rates until April 2028
Come onroller coasterfrom last year, when National Insurance (NIC) rates changed mid-year, they should remain fixed from April 2023. The basic NIC limit for employees and the lower tier 2 earnings limit for the self-employed are frozen until April of 2028.
Employers generally start paying 13.25% Class 1 Secondary NIC on their employees' wages at £9,100. This limit will also remain until April 2028.
Tax advice – can you claim Employment Allowance?
As eligible companies can claim Working Allowance to reduce their employer's annual national insurance liability by up to £5,000, you should check whether this can be claimed.
In general, you can claim Working Allowance if you are a business and your employer's Class 1 National Insurance liabilities in the previous tax year were less than £100,000. Exceptions apply, the main one being that you cannot claim if you are a company with only one employee paid above the Class 1 National Insurance sub-threshold and the employee is also a director of the company.
Reduced annual capital gains tax exemption amount
From April 2023, theCapital gains taxThe (CGT) relief that most people can claim will fall from £12,300 to £6,000 and back to just £3,000 from April 2024. Anyone selling assets subject to CGT should consider the additional tax that may be result from the reduction in compensation.
Tax advice – take advantage of tax-advantaged investment options
If you hold qualifying investments outside of an ISA, you may be required to pay CGT on any gains you make on the fee. Now is a good time to consider saving through an ISA in the future and possibly convert some investments into an ISA. Transferring investments into an ISA can be considered a chargeable event for CGT purposes, so you should check your situation before taking any action.
You should bear in mind the need to seek investment advice from a registered financial adviser, with whom we work closelyFinancial services from TaxAssistwho can provide independent investment advice and a full range of services for your financial planning needs.
Frozen assets tax thresholds
The nil-rated Inheritance Tax (IHT) bracket of £325,000 will be frozen until April 2028. In addition, the nil-rated residence bracket will also be frozen at £175,000. The phasing out of the nil interest rate band for homes will freeze at £2m.
Tax advice - consider an IHT assessment
According to HMRC, IHT revenue for April 2022 to January 2023 was £5.9 billion, which is £0.9 billion higher than the same period last year.
The zero rate freeze, combined with rising house prices, has resulted in more IHT going to HMRC and for properties that may have to pay IHT, there are a number of steps that can be taken to reduce tax exposure . For people whose property will fall into the IHT net, the key point is to act sooner rather than later and consider seeking specialist advice.
Increase in corporate tax
The biggest tax increase facing UK businesses is theincrease in corporate taxfrom April 2023.
Prices will increase as follows:
- The main rate of corporation tax rises to 25% when profits exceed £250,000.
- A new 'small profits' corporation tax rate of 19% will apply where profit is £50,000 or less.
- For companies whose profits are between £50,000 and £250,000, they are eligible for marginal relief, so that profits on the margin (falling between the upper and lower limits) pay an effective rate of tax of 26.5%.
- The upper and lower tax thresholds are reduced according to the number of tax-linked companies. Companies will be connected when one is in control of the other or where both are under common control.
Business owners should take steps to ensure they are as tax efficient as possible and consider the following:
Companies with common control issues or group structures should consider the associated company issue to see if it can be restructured to save tax.
Tax credits for research and development
If you have developed new or improved products or processes, you should check your eligibility to make a claim as valuable tax relief may be available. Reforms to the R&D scheme come into effect from April 2023, so you should review any claims to determine what valuable help you can unlock.
Use of losses
Previously, companies that had trading losses usually carried them forward to a previous year and received a tax refund of 19%. A company may be better off carrying forward the loss and getting a tax refund of up to 26.5%. It is important to balance the cash flow advantage of a 19% repayment with the ability to receive a higher repayment at a later date.
Companies must audit and insure their debtorsbad debts are handled properly. You don't want to pay taxes on income you'll never receive.
If your business has a lot of stock, check if you can make specific provision for slow stock or damaged stock.
Recruitment of family members
For some companies, it may be appropriate to consider employing spouses and relatives. Restrictions apply and wages must be responsible and commercial.
The VAT registration and write-off thresholds will also be frozen at £85,000 and £83,000 respectively for a further two years from 1 April 2024.
Tax advice – change of VAT status
Switching to a different VAT system can reduce the administrative burden or postpone the point at which VAT becomes chargeable.
Give your business an edge today
Taking time now to look ahead to the financial year will give you a comprehensive plan for the coming months. If you need help or advice on the financial aspects of running your business, call us today0800 0523 555or fill us inonline application form.
Publication date February 24, 2023 | Last updated on April 13, 2023
Content written by: Andy Gibbs
This article is intended to inform rather than advise and is based on current law and practice. Taxpayers' circumstances vary and if you believe the information provided is useful, it is important that you contact us prior to application. Whether or not you take any action as a result of reading this article before you receive our written approval, we will not accept liability for any financial loss.
- Financial gifts received from others.
- Disability insurance payments.
- Qualified withdrawals from a Roth IRA account.
- Selling your home and meeting the requirements to exclude the gain.
- Qualified municipal bonds interest income.
Expansionary fiscal policy
It entails the government spending more money, lowering taxes or both. The goal of expansionary fiscal policy is to put more money in the hands of consumers so they spend more to stimulate the economy.
- Contribute to a 401(k) or Traditional IRA.
- Enroll in Your Employee Stock Purchasing Program.
- Deduct Business Expenses.
- If You Can, Invest in Qualified Opportunity Funds.
- Donate Stocks Through Donor-Advised Funds.
- Sell Poor-Performing Stocks.
- Deduct Student Loan Interest.
Supply-side tax cuts are aimed to stimulate capital formation. If successful, the cuts will shift both aggregate demand and aggregate supply because the price level for a supply of goods will be reduced, which often leads to an increase in demand for those goods.How will taxes change in 2023? ›
How other tax provisions changed for 2023. The standard deduction also increased by nearly 7% for 2023, rising to $27,700 for married couples filing jointly, up from $25,900 in 2022. Single filers may claim $13,850, an increase from $12,950.Does raising taxes reduce inflation? ›
Bazelon and Singh seem to be attracted to the Modern Monetary Theory idea that revenue from higher taxes can be “sucked” out of the economy, thereby reducing the money supply and lowering inflation. While such a situation is conceivable, it is most likely to occur if new revenue is used to reduce the federal debt.Is government spending or tax cuts better? ›
Fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases. As for fiscal adjustments, those based on spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based on tax increases.What are the 4 economic impacts of taxes? ›
How do taxes affect the economy in the long run? Primarily through the supply side. High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits.What are the 3 basic tax planning strategies? ›
There are a number of ways you can go about tax planning, but it primarily involves three basic methods: reducing your overall income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits.What is the easiest way to reduce taxable income? ›
An effective way to reduce taxable income is to contribute to a retirement account through an employer-sponsored plan or an individual retirement account. Both health spending accounts and flexible spending accounts help reduce taxable income during the years in which contributions are made.
Those rates—ranging from 10% to 37%—will remain the same in 2023. What's changing is the amount of income that gets taxed at each rate. For example, in 2023, an unmarried filer with taxable income of $95,000 will have a top rate of 22%, down from 24% in 2022.Do tax cuts for the rich help economy? ›
Overall, our analysis finds strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.How can I reduce my taxable income in the US? ›
How Can I Reduce My Taxable Income? There are a few methods that you can use to reduce your taxable income. These include contributing to an employee contribution plan, such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.What is the largest source of federal revenue? ›
Sources of Federal Revenue
Additional sources of tax revenue consist of excise tax, estate tax, and other taxes and fees. So far in FY 2023, individual income taxes have accounted for 50% of total revenue while Social Security and Medicare taxes made up another 37%.
If you're 65 or older, your additional standard deduction increases from $1,400 to $1,500 if you're married and from $1,750 to $1,850 if you're single or the head of household. Marginal tax rates are the same in 2023 as in 2022. The lowest rate is still 10 percent and the highest is still 37 percent.Will tax returns be bigger in 2024? ›
The inflation-adjusted increases to certain tax credits, deductions, and tax brackets for next year could translate into larger tax refunds when folks file their taxes in 2024. The tax bracket ranges are increasing by 6.9% on average for the 2023 tax year, according to the National Association of Tax Professionals.What will bring down inflation? ›
The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.Why is inflation a tax on the poor? ›
High inflation exerts an excessive burden on the poor with disproportionate increase in the food and energy prices, which makes up a larger share of their consumption, while their nominal income does not keep up. High inflation complicates revenue (as well as public spending) policies.How do you fight inflation? ›
- Cut costs at the grocery store.
- Save money on transportation.
- Plan ahead for cheaper vacations.
- Check your budget.
- Pay down credit card debt.
- Earn money on your savings.
- Major health programs, such as Medicare and Medicaid.
- Social security.
- Defense and security.
During recession, the total level of spending decreases. The government can fill the spending gap by using its power to tax and spend. If the government uses expansionary policy and reduces tax rates and increases its spending on goods and services, it will likely result in extra income and spending in the economy.What happens if government spending and taxes increase? ›
The balanced-budget multiplier is equal to 1 and can be summarized as follows: when the government increases spending and taxes by the same amount, output will go up by that same amount.Will taxing the rich fix income inequality? ›
Because high-income households pay a larger share of their income in total federal taxes than low-income households, federal taxes reduce income inequality. But federal taxes have done little to offset increasing income inequality over the past 40 years.Which tax is most harmful for economic growth? ›
Corporate taxes are the most harmful form of taxation to economic growth.What are the benefits of raising taxes? ›
Raising income tax rates on high-income residents can enable states to boost investment in education, infrastructure, and other vital services that strengthen local communities and aid long-term economic growth.What is a tax loophole? ›
A tax loophole is a tax law provision or a shortcoming of legislation that allows individuals and companies to lower tax liability. Loopholes are legal and allow income or assets to be moved with the purpose of avoiding taxes.What are the 5 pillars of tax planning? ›
The five pillars of financial planning—investments, income planning, insurance, tax planning, and estate planning— are a simple but comprehensive approach to financial planning. They are foundational in the course for financial freedom in any financial plan.How can high income earners lower taxes? ›
- 2023 Federal Income Tax Brackets. ...
- Max Out Your Retirement Contributions. ...
- Roth IRA Conversions. ...
- Buy Municipal Bonds. ...
- Sell Inherited Real Estate. ...
- Set Up a Donor-Advised Fund. ...
- Use a Health Savings Account. ...
- Invest in Companies that Pay Dividends.
You can defer paying income tax on up to $6,000 that you contribute to an IRA, or $7,000 if you are age 50 or older in 2022. Married couples can open an account in each of their names for double the tax break. Read: IRA Contribution Limits for 2022.Does 401k reduce taxable income? ›
With tax-deferred 401(k) plans, workers set aside part of their pay before federal and state income taxes are withheld. These plans save you taxes today. Money pulled from your take-home pay and put into a 401(k) lowers your taxable income so you pay less income tax now.
By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.How to get the biggest tax refund in 2023? ›
- Try itemizing your deductions.
- Double check your filing status.
- Make a retirement contribution.
- Claim tax credits.
- Contribute to your health savings account.
- Work with a tax professional.
According to early IRS data, the average tax refund will be about 11% smaller in 2023 versus 2022, largely due to the end of pandemic-related tax credits and deductions.What is the inflation adjustment for taxes in 2023? ›
Inflation last year reached its highest level in the United States since 1981. As a result, the IRS announced the largest inflation adjustment for individual taxes in decades: 7.1 percent for tax year 2023.Why do the rich get so many tax breaks? ›
Billionaires like Warren Buffett pay a lower tax rate than millions of Americans because federal taxes on investment income (unearned income) are lower than the taxes many Americans pay on salary and wage income (earned income).Do rich people get more tax breaks? ›
The tax code is often said to benefit higher earners the most. While the wealthy might get more of a tax break from certain deductions, they also lose out on certain deductions.What is trickle down approach? ›
The trickle-down theory states that tax breaks and benefits for corporations and the wealthy will trickle down to everyone else. Trickle-down economics involves less regulation and tax cuts for those in high-income tax brackets as well as corporations.How do I avoid taxes on a large sum of money? ›
- Tax-Loss Harvesting. Tax-loss harvesting allows you to lock in investment losses for the express purpose of lowering your taxable income. ...
- Deductions and Credits. ...
- Donate To Charity. ...
- Open a Charitable Lead Annuity Trust. ...
- Use a Separately Managed Account.
Tax avoidance is generally a legal way that taxpayers can avoid paying taxes. They can do so by using tax credits, deductions, exclusions, and loopholes that are part of the tax code to their advantage. Using these strategies can help them either avoid paying taxes altogether or lower their tax liability.Why do I pay so much in taxes and get so little back? ›
Answer: The most likely reason for the smaller refund, despite the higher salary is that you are now in a higher tax bracket. And you likely didn't adjust your withholdings for the applicable tax year.
Among those taxpayers, the average income tax rate was 14.6% and the average tax paid was $20,663. The OECD reported that the U.S. "tax wedge" for the average single worker was 28.4% in 2021.Who pays the most taxes in the United States? ›
A single taxpayer who earns $300,000 a year will pay a top tax rate that's higher than another taxpayer who makes $40,000 a year. The highest income tax bracket for the 2022 and 2023 tax years is 37%.How much is the US in debt? ›
In dollar terms, debt held by the public at the end of 2022 was $24.26 trillion. Such debt is issued in a range of maturities from 1-month bills to 30-year bonds. It also includes securities that are not traded in secondary markets, such as savings bonds and state and local government securities.What is the extra standard deduction for seniors over 65? ›
If you are age 65 or older, your standard deduction increases by $1,700 if you file as single or head of household. If you are legally blind, your standard deduction increases by $1,700 as well. If you are married filing jointly and you OR your spouse is 65 or older, your standard deduction increases by $1,350.What will tax returns be like in 2023? ›
Refunds may be smaller in 2023.
In addition, taxpayers who don't itemize and take the standard deduction won't be able to deduct their charitable contributions like they were able to on their 2021 returns.
Effective tax rates measure tax liability as a proportion of income and are typically lower than the statutory tax rate because they reflect deferrals, credits, and other tax benefits.What affects effective tax rate? ›
An effective tax rate is calculated by taking the actual income tax expense and dividing it by the company's actual net income. Effective tax rate is often used by investors as a profitability metric for a company as it measures how well a company utilizes tax-advantaged strategies.What are 3 ways of reducing the taxes you pay? ›
There are a few methods that you can use to reduce your taxable income. These include contributing to an employee contribution plan, such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.Why is the effective tax rate always lower? ›
Your effective rate is always going to be lower than your marginal rate because your income is taxed at lower rates first, before making its way up to the higher rates, and eventually, your highest rate (aka. your marginal rate).What causes effective tax rate to increase? ›
If firms defer taxes, the taxes paid in the current period will be at a rate lower than the marginal tax rate. In a later period, however, when the firm pays the deferred taxes, the effective tax rate will be higher than the marginal tax rate.
High marginal tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources. But tax cuts can also slow long-run economic growth by increasing deficits.How can I avoid a higher tax bracket? ›
Increasing your retirement contributions, delaying appreciated asset sales, batching itemized deductions, selling losing investments, and making tax-efficient investment choices can help you avoid moving into a higher tax bracket.What is the highest tax rate in the US? ›
Here's an explanation for how we make money . There are seven tax brackets for most ordinary income for the 2022 tax year: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.What is the highest effective federal tax rate? ›
Our opinions are our own. Here is a list of our partners and here's how we make money. In 2022 and 2023, the U.S. federal tax rates range from 10% to 37%. The U.S. has a progressive tax system, where portions of a person's taxable income can fall into different brackets to be taxed at different rates.What is the average effective tax rate in the US? ›
Key Takeaways. One measure of average income tax burden reports a figure of 13.3% for all taxpayers, but coming up with an average is surprisingly difficult. For the tax year 2022, the federal income tax brackets range from 10% to 37%.Is it better to claim 1 or 0? ›
By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.What are 3 main factors that impact the amount of taxes we pay? ›
The federal government uses a progressive tax system that applies higher tax rates to people who make more money. But a number of factors—like filing status, source of income, pre-tax contributions and eligible tax deductions and credits—could affect how much a taxpayer owes.What is the federal tax rate for someone making $60000 a year? ›
A single filer earning $60,000 in 2022 will pay: 10% federal income tax on the first $10,275 of income (which comes to $1,027.50 in taxes) 12% on dollars $10,276 up to $41,775 ($3,779.88 in taxes) 22% on $41,776 up to $60,000 ($4,009.28 in taxes)How much federal tax should I pay on $8 000? ›
If you make $8,000 a year living in the region of California, USA, you will be taxed $700. That means that your net pay will be $7,300 per year, or $608 per month. Your average tax rate is 8.8% and your marginal tax rate is 8.8%.What is the average tax return for a single person making $60000? ›
If you make $60,000 a year living in the region of California, USA, you will be taxed $13,653. That means that your net pay will be $46,347 per year, or $3,862 per month.