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How to avoid these five major tax hikes in 2023

Paloma Kubiak
Written By:
Paloma Kubiak

It’s a New Year and with it comes a number of tax changes set to dent the pound in your pocket. Here are the major tweaks to watch out for, plus solutions to help you pay less and keep more of your hard-earned cash.

Following the disastrous mini Budget and the ‘correcting’ Autumn Statement last year, the Chancellor Jeremy Hunt announced some major tax changes which will impact your finances.

Here are five to note for the year ahead, and solution to help you keep more of your money:

1) Capital Gains Tax

CGT is a tax on profit when you sell an asset that has increased in value, such as property that’s not your main home or shares outside of an ISA or PEP. It’s paid by a small number of people, with figures revealing 323,000 taxpayers were caught in the net in 2020/21. The annual exempt allowance is currently £12,300 (£6,150 for trusts), with profit above this being taxed up to 28%.

The annual exempt amount for Capital Gains Tax will be more than halved from the current £12,300 to £6,000 in April. It will then be slashed again to £3,000 from April 2024.

What’s the solution?

Use tax-free wrappers and reduce your exposure to CGT via allowances, says Chris Springett, tax partner at wealth management firm Evelyn Partners. He explains that investments held in ISAs and pensions are exempt from CGT.

“In terms of reducing CGT exposure, married couples and those in civil partnerships can transfer assets to each other – known as an interspousal transfer – to make use of both sets of allowances, as well as shift a potential gain to whichever partner might be exposed to a lower tax band.”

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown says house prices were up 12.6% in the year to October, which means higher CGT bills for second property investors who sell up.

“Slashing the CGT threshold is a particular challenge for buy-to-let investors, who can’t benefit from tax wrappers, or from realising their gains year by year, to take advantage of allowances. They could be faced with a hefty bill in just one hit, which may discourage them from selling.”

Meanwhile to tackle this, Jamie Mathieson, head of private client in London at JMW Solicitors, says: “In an already challenging economic landscape for landlords, this huge cut in the annual CGT allowance could result in a fire sale of second homes before April.

“Taxpayers concerned about these changes are likely to consider timings of gifts or sales to make the most of their allowances or to consider alternative ownership structures.”

2) Council Tax

From April, local authorities in England will be able to increase council tax by up to 5% a year without holding a referendum (3% for all local authorities and an additional 2% for local authorities with social care responsibilities). This is the biggest hike since 2018.

Currently, Council Tax includes a referendum threshold for increases at 2%. But social care authorities can also levy a maximum 1%.

Coles says the enormous rise in the cost of social care, and the additional cost of National Insurance on council wage bills, is going to put them under real pressure, “so many of them are likely to raise Council Tax as much as they possibly can. It means band D council tax could rise from an average of £1,966 to as much as £2,064.”

What’s the solution?

Check to see if you may be entitled to a Council Tax reduction, such as if you live alone, have a live-in carer or live with under-18s or students. The single person discount is 25%, while those with a live-in carer could get up to 50% off.

According to MoneySavingExpert, some councils may allow you to backdate claims, which could mean you receive hundreds or even thousands back.

The savings site also explains that those who receive the guaranteed part of pension credit could be eligible for a full reduction, while those who get the savings part may get a discount.

You usually need to contact your own council or local authority to see if you’re eligible for a discount.

3) Dividend Tax

The dividend allowance is an extra tax-break which applies to funds or shares that are held outside of a pension or an ISA.

The amount someone can earn before paying tax on dividends will fall from £2,000 to £1,000 from April.

Laura Suter, head of personal finance at AJ Bell says: “The move means that a higher-rate taxpayer taking home more than £2,000 in dividends each year will pay £338 a year more in tax. It will also drag more people into the taxman’s reach, with many of those receiving between £1,000 and £2,000 a year in dividends paying the tax for the first time.”

What’s the solution?

Jason Hollands, managing director of online investment platform and financial coaching service, Bestinvest, says returns on savings and investments held in ISAs are tax free.

“With cuts to the amount of dividend income that can be received tax free on the way, as well as reductions in the annual capital gains exemptions, it makes sense to protect your savings and investments as far as you can by utilising ISAs.

“If you can’t decide whether to invest or are nervous about current markets, then secure your allowance with cash before the end of the tax year and decide later where to invest. And if you don’t have the cash available to invest in an ISA, but do have shares or funds held outside ISAs, then consider selling those and repurchasing them with an ISA – a process known as ‘Bed and ISA’ – as it will help keep future returns out of the reach of the tax man.”

4) Income Tax

The personal allowance, and income tax bands will be frozen for another two years until 2028.

Meanwhile there will be a cut to the threshold for additional rate of tax from £150,000 to £125,140 from April. An estimated 5.5 million people are expected to be pulled into the highest tax bands this year, and experts said that eight million people will pay a higher rate of tax at 40% following the changes.

What’s the solution?

Hollands says: “Investing in a pension is the best way to reduce an income tax liability, since tax relief is provided at your marginal tax rate which is particularly attractive to the rapidly growing number of people subject to the higher tax bands.

“This means, for example, that someone paying 40% tax, can make a gross pension contribution of £1,000 at a net cost of £600 after tax relief. In many ways it is surprising that the Chancellor did not move against this in the Autumn Statement, but the continuation of these generous reliefs for those on higher rate tax cannot be taken for granted as there is a full Budget coming in the Spring.”

Indeed, figures released this week revealed that pension schemes saved Brits £26.9bn of income tax in 2021/22, up by £7.1bn over five years. They’re also expected to save taxpayers £27bn this tax year.

5) Inheritance Tax

Hunt confirmed that the IHT threshold would be maintained until 2028, an additional two years on the previous deadline of 2026.

Experts said the freeze would mean more people would be dragged into paying IHT, levied at 40% on estates worth more than £325,000. But, individual homeowners can pass on properties worth up to £500,000 completely IHT free. This is because on top of the nil-rate band (up to £325,000), there is also a main residence nil-rate band standing at £175,000.

What’s the solution?

David Stevens, retirement director at LV=, says people have several options to reduce IHT liabilities including:

Making gifts: Up to £3,000 can be gifted each tax year and is immediately outside your estate for inheritance tax purposes (up to £6,000 if the exemption wasn’t used in the previous tax year). Other gifts will normally only fall outside your estate if you survive for seven years after making them

Passing on a pension: Most pension pots will not be part of your estate for inheritance tax purposes, so it can be beneficial to consider spending other assets first.

In addition, if you have more income (pension or otherwise) than you need to maintain your normal standard of living and you regularly gift the excess income away on a habitual basis, these gifts could fall under the ‘normal expenditure out of income’ inheritance tax exemption . This means they won’t be chargeable to inheritance tax even if you don’t survive seven years (It is best to seek professional advice on this point).

Taking out a life insurance policy to cover the tax bill: If your estate is likely to pay inheritance tax, you could consider taking out a whole of life insurance policy placed in trust that will cover the tax bill. Alternatively, if gifting assets to bring your estate below the inheritance tax threshold, a level term life assurance policy that lasts for seven years (the time the gift remains in your estate) may be more appropriate.

Using trusts: If not ready to make outright gifts, the use of trusts allows you to move assets outside your estate, but still retain control over who will benefit and when. As the person setting up the trust, you can’t normally be a trust beneficiary as well. However, there are some trusts (for example, loan trusts) that allow you to retain access to the funds, whilst still offering inheritance tax advantages. When using trusts, financial advice will nearly always be needed.