Sarah Bradford looks at the tax rates and allowances applying for 2022/23 and considers how to take advantage of allowances to maximise tax-free income.
The tax rates and allowances that will apply for the 2022/23 tax year have now been confirmed. There were few surprises, as the Chancellor had announced in his March 2021 Budget that most rates and allowances would be frozen at their 2020/21 level until April 2026.
The availability of different allowances for different types of income, and for capital gains, means that the opportunity for enjoying tax-free income and gains can be enhanced by having different income streams to benefit from the range of allowances available.
Income tax rates 2022/23
As for 2021/22, for 2022/23 the basic rate of income tax remains at 20% and applies to the first £37,700 of taxable income.
Likewise, the higher rate remains at 40%, applying to taxable income from £37,701 to £150,000. The additional rate, which remains at 45%, applies to taxable income over £150,000.
The personal allowance remains at £12,570 for 2022/23. As previously, this is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. This means that anyone with adjusted net income of £125,140 will not receive a personal allowance in 2022/23.
The loss of the personal allowance, combined with the 40% tax rate, means that the marginal rate of tax increases to 60% for income falling between £100,000 and £125,140. Consideration could be given to delaying income or making pension contributions or charitable donations to preserve some or all the personal allowance and reduce the income attracting high marginal rates.
At the lower end of the income scale, married couples and civil partners where neither pays tax at the higher or additional rate can take advantage of the marriage allowance if one spouse or civil partner has income which is below the personal allowance of £12,570. The marriage allowance allows the person who is unable to use their full personal allowance to transfer £1,260 of it to their spouse or civil partner, which will increase the recipient’s personal allowance to £13,830 while reducing the donor’s personal allowance to £11,310. This can save a couple up to £252 in tax in 2022/23 (i.e., £1,260 @ 20%).
Married couples and civil partners where at least one spouse or civil partner was born before 6 April 1935 can also benefit from the married couple’s allowance. This is increased for 2022/23 to £9,425 (from £9,125 for 2021/22). However, where income exceeds £31,400, the married couple’s allowance is reduced by £1 for every £2 by which this limit is increased until the minimum amount of the married couple’s allowance is reached. For 2022/23, this is set at £3,640.
The blind person’s allowance is also increased for 2022/23, rising from £2,520 to £2,600.
To maximise tax-free income, it is important that best use is made of allowances to ensure that they are not lost unnecessarily or wasted. This can include, for example, tailoring capital allowance claims so income is not reduced below the level of the available personal allowances.
Tax breaks for savings
There are a number of tax breaks for savings income, which allow differing amounts of savings income to be received tax-free, depending on the circumstances.
There is a separate savings allowance, which is available to basic and higher rate taxpayers in addition to their personal allowance. For 2022/23, this remains at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.
A separate savings starting rate of 0% applies where taxable non-savings income is not more than £5,000. The 0% rate applies where savings income falls within the savings rate band. This is set at £5,000 for 2022/23 but is reduced by a person’s taxable non-savings income (i.e., income not sheltered by the available personal allowances).
Savings income from tax-free accounts, such as ISAs, is also received tax-free and does not eat into the savings or personal allowances.
Dividends, allowance and tax rates
Dividends have their own tax rates, and their own allowance.
The dividend allowance remains at £2,000 for 2022/23. It is available to all individuals, regardless of the rate at which they pay tax. However, although it is called an ‘allowance’ it is really a nil rate band, with dividends falling within the ‘allowance’ being taxed at a zero rate.
Dividends are treated as the top slice of income and are taxed at the dividend rates of tax rather than at the normal income tax rates. The rates are lower to take into account the fact that the profits from which dividends are paid have already suffered corporation tax.
The dividend rates of tax are increased next year as part of a package of measures to raise ‘ring-fenced’ funds for tax and social care. The dividend ordinary rate, which applies to dividends falling within the basic rate band, is set at 8.75%; the dividend upper rate, which applies to dividends falling within the higher rate band, is set at 33.75%, and the dividend additional rate, applying to dividends falling within the additional rate band, is set at 39.35%.
In a family company scenario, tax-free income can be maximised by using an alphabet share structure and, where sufficient retained profits are available, paying dividends to ensure that the dividend and personal allowances of family members are not wasted.
Maximising tax-free income
The maximum income which can be received tax-free will depend on circumstances. However, by having a mix of income streams, it is possible to take advantage of the various allowances available.
For example, a person who has taxable non-savings non-dividend income of £12,570, savings income of £6,000 and dividend income of £2,000 would be able to enjoy tax-free income of £20,570. This figure would be higher if the person was in receipt of the marriage allowance or the married couple’s allowance. It would also be enhanced by any non-taxable income, such as from ISAs.
Spouses and civil partners can maximise their joint tax-free income by (where possible) ensuring that income is received and underlying investments are held in a way that ensures that use is made of all available allowances, and any income which is taxable is taxed at the lowest possible rates.
National Insurance contributions
The rates of Class 1, Class 1A, Class 1B and Class 4 National Insurance contributions (NICs) are all increased by 2.5% for 2022/23 only, pending the introduction of the Health and Social Care Levy.
For Class 1 NICs purposes, the lower earnings limit is £123 a week, the primary threshold is £190 per week, and the upper earnings limit is £967 per week for 2022/23. Contributions on earnings between the primary threshold and the upper earnings limit are payable at 13.25%, and contributions on earnings in excess of the upper earnings limit are payable at 3.25%. Employers are liable to NICs at 15.05%.
The self-employed will pay Class 2 contributions of £3.15 per week on profits in excess of the small profits threshold (set at £6,735 for 2022/23); and Class 4 contributions at 10.25% on profits between £9,880 and £50,270, and 3.25% on profits in excess of £50,270.
Those operating through a personal and family company can pay a salary of £9,880 (equal to the primary threshold) without paying any employee’s NICs or tax (as long as the personal allowance has not been used elsewhere).
In addition to the allowances available for income tax purposes, a person is also able to realise tax-free gains up to the capital gains tax (CGT) annual exempt amount each year. This remains at £12,300 for 2022/23. Spouses and civil partners can take advantage of the ability to transfer assets between them at a value that gives rise to neither a gain nor a loss, to ensure that both annual exempt amounts are used before any CGT is payable.
As with income tax allowances, the CGT annual exempt amount is lost if not used in the year. Consideration should therefore be given to whether it is beneficial to realise gains each year to benefit from the annual exempt amount.
Where possible, organise your financial affairs to take advantage of the various allowances available to maximise the amount of income you can receive tax free each year.