The UK government has recently announced changes to income tax rates and allowances, which will have a significant impact on individuals’ tax liabilities over the next few years.

The personal allowance and basic rate band threshold are set to remain frozen until 5 April 2028, meaning that more people will move into higher tax bands as their earnings increase. The article also includes a summary table of key income tax rates and allowances for the tax year to 5 April 2024, and outlines different banding systems for Scottish taxpayers.

There is also good news for those saving in a personal pension, with the current pension lifetime allowance charge being abolished and the pension annual allowance increasing from £40,000 to £60,000 from 6 April 2023. The article provides useful information and insights for individuals looking to manage their tax liabilities and make tax-efficient savings.

Increasing Liabilities

The personal allowance and basic rate band threshold are now frozen in place until 5 April 2028. As earnings increase, individuals will move into higher tax bands. This is often referred to as ‘fiscal drag’ because it will raise more tax without the government increasing income tax rates.

The personal allowance continues to be partially and then fully withdrawn for higher earners, with £1 of personal allowance lost for every £2 of adjusted net income over £100,000.

Summary table of key income tax rates and allowances for the tax year to 5 April 2024 (2023/24):

Band	Taxable Income	Tax rate in 2023/24
		Other income	Savings income	Dividend income
Personal allowance	Up to £12,570	0%	0%	0%
Basic rate	£12,571 – £50,270	20%	20%	8.75%
Higher rate	£50,271 – £125,140	40%	40%	33.75%
Additional rate	Over £125,140	45%	45%	39.35%

 

Other Allowances

Savings income continues to benefit from a personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Dividend income attracts a £1,000 dividend allowance in 2023/24, down from the £2,000 allowance seen in previous years. These allowances are in addition to the personal allowance and attract a 0% rate of income tax.

Scotland

Individuals living in Scotland and classed as Scottish taxpayers have a slightly different banding system for ‘other income’ (non-savings, non-dividend) as follows:

Band	Taxable Income	Tax rate in 2023/24
		Other income
Personal allowance	Up to £12,570	0%
Starter rate	£12,571 – £14,732	19%
Basic rate	£14,733 – £25,688	20%
Intermediate rate	£25,689 – £43,622	21%
Higher rate	£43,623 – £125,140	42%
Top rate	Over £125,140	47%

 

The application of income tax to savings and dividends income is the same as for the rest of the UK.

Pension Tax Relief

There was good news in the Budget for those saving in a personal pension. The current pension lifetime allowance (LTA) charge is being abolished from 6 April 2023. The LTA has caused some high earners, particularly doctors, to retire early as tax charges apply on crystallisation of pension funds if the LTA (currently £1,073,100) is exceeded.

Individuals may be able to receive 25% of their pension savings as a tax-free lump sum when they become entitled to their pension benefits. This is currently capped at 25% of the LTA and going forwards, for most individuals, will remain capped at £268,275.

Another pension limit increased by the Chancellor in the Budget was the pension Annual Allowance (AA) which increases from £40,000 to £60,000 from 6 April 2023. The AA applies to the combined pension input by the individual and, in the case of employees, their employer. Pension contributions in excess of the AA result in a tax charge on the individual, although they may take advantage of unused AA amounts from the 3 previous tax years.

For those with high incomes, the AA is tapered. From 6 April 2023, where a taxpayer’s adjusted income exceeds £260,000 (increasing from £240,000), the AA is tapered by £1 for every £2 more than £260,000, down to a minimum of £10,000 (increasing from £4,000).

The Money Purchase Annual Allowance (MPAA) replaces the AA when an individual starts to flexibly access a defined contribution pension scheme. The MPAA will increase from £4,000 to £10,000 on 6 April 2023.

Note that an individual’s pension contributions can be very tax efficient depending on their level of income.

The taxation rules for pensions are complex as there have been numerous changes in recent years so please talk to us about your pension contribution strategy.

Tax Efficient Savings

There were no changes to the annual limits for Individual Savings Accounts (ISAs), Child Trust Funds or the Junior ISA. These limits remain at £20,000, £9,000 and £9,000 respectively.