The UK government's recent budget announcements included a number of changes to tax thresholds and allowances that are set to impact millions of taxpayers. One of the most significant changes is the freezing of base and higher rate thresholds until 2028 at £12,570 and £50,271, respectively. This means that more taxpayers will be dragged into the higher rate 40% tax bracket, with over a million expected to face 40% tax charges for the first time as a result of the freeze.
In addition to the frozen thresholds, the additional rate threshold will be lowered from £150,000 to £125,140 from 6 April, and this is the income level at which an individual will not have any personal allowance, because £1 of the personal allowance is withdrawn for every £2 of income above £100,000. As a result of this change, an additional 232,000 taxpayers will be drawn into additional rate tax for the first time, with those earning between £125,140 and £150,000 expected to experience an average cash loss of £621. The reduction in allowance is expected to raise £420,000 in tax year 2023-24 and will affect around 792,000 taxpayers.
In Scotland, there will also be increases in various personal tax rates, with the higher rate of tax paid on income between £43,663 and £125,140 increasing by 1p to 42p, and the top rate of tax (paid on income above £125,140) increasing by 1p to 47p. This means that Scots with earnings above £43,663 will pay more income tax than they did last year, with the decision to increase the higher and top rates widening the difference in income tax liabilities between those on equivalent earnings in Scotland and the rest of the UK.
Another major change that will impact taxpayers is the reduction in the dividend allowance to £1,000 from 6 April 2023, and then to £500 from 6 April 2024. This is a significant fall from the current level of £2,000, and will mean that many individuals who have not previously engaged with HMRC will now have to do so. Retired individuals, in particular, are expected to be affected by this change, as they may now have a notification obligation although they will not be higher rate taxpayers and will not be required to pay any extra tax.
There are also changes to capital gains tax (CGT) allowances, with taxpayers now starting to pay tax on gains in excess of £6,000. The annual exempt amount will be £6,000 for individuals and personal representatives, and £3,000 for most trustees. This exemption will be reduced further in 2024-25 to £3,000 for individuals, and only £1,500 for most trustees. As a result of this change, around 500,000 individuals and trusts per year could be affected, increasing on a cumulative basis to 570,000 in 2024-25.
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