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Personal Tax Planning What You Need to Know About Income Tax
6 June 2023
How much Income Tax you pay each tax year depends on how much of your income’s above your Personal Allowance and how much of your income falls within each tax band.
You can use GOV UK’s Income Tax service to check your tax code and Personal Allowance. You’ll also be able to find out how much tax you’ve paid in the current tax year and how much you’re likely to pay for the rest of the year.
WHAT iS A TAX-FREE PERSONAL ALLOWANCE?
The standard HMRC tax Personal Allowance is £12,570 (at time of writing, 2023). This is the amount of income you don’t need to pay any tax on.
If you claim Marriage Allowance (which lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner) or Blind Person’s Allowance (an extra amount that’s added to your yearly Personal Allowance), your overall Personal Allowance will be bigger.
If your income’s over £100,000, your Personal Allowance will be reduced.
WHAT ELSE COULD I HAVE TAX-FREE ALLOWANCES FOR?
You could have tax-free allowances for:
- Savings interest
- Dividend income (if you own shares in a company)
- Your first £1,000 of income from self-employment, also known as your ‘trading allowance’ (this is in place of claiming expenses that are less than £1,000)
- Your first £1,000 of income from property you let (this is in place of claiming expenses that are less than £1,000)
You’ll pay tax on any interest, dividends or income OVER your allowances.
WHAT ARE THE INCOME TAX BANDS?
At time of writing, these are the tax rates you’ll pay in each band if you have a standard Personal Allowance of £12,570. These are expected to remain the same until 2026.
|BAND||TAXABLE INCOME||TAX RATE|
|Personal Allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £125,140||40%|
|Additional rate||Over £125,140||45%|
Note: If you live in Scotland, these rates will be different.
ADDITIONAL RATE THRESHOLD LOWERED
In April 2023, the threshold for the additional rate of Income Tax fell from £150,000 to £125,140, which consequently meant thousands of people on higher incomes would be liable for paying the 45% rate of tax and 39.35% for Dividend Tax.
HOW TO CLAIM INCOME TAX RELIEFS
Our Tax team at Fortus can work with you to explore all routes to claiming any Income Tax reliefs you’re eligible for. Some you’ll get automatically, but others you’ll need to apply for.
Tax relief applies to your:
- Pension contributions
- Charity donations (via Gift Aid or Payroll Giving)
- Maintenance payments (to an ex-spouse or civil partner)
- Work or business expenses (if you’re self-employed)
CONSIDERED INTER-SPOUSE TRANSFERS?
Did you know you can maximise Income Tax rates and allowances through inter-spouse exempt transfers? For individuals whose annual income’s between £100,001 and £125,140, it’s an ideal way to reduce your tax liabilities.
TAX EFFICIENT INVESTMENTS TO REDUCE INCOME TAX LIABILITY
There are tax efficient investments you can make as an individual which will reduce your tax liability. These include:
Venture Capital Trusts (VCTs)
Dividends received through Venture Capital Trusts (VCTs) are tax-free and there’s no Capital Gains Tax (CGT) payable on any gains made when they’re sold. So, if you invest up to an annual maximum of £200,000, you’ll qualify for Income Tax relief which will reduce your tax liability in the year of investment by a maximum of 30%.
Enterprise Investment Schemes (EIS)
Enterprise Investment Schemes (EIS) encourage investment in small UK start-ups or early-stage businesses. Those investing in such qualifying companies benefit from a series of tax reliefs.
If you invest up to an annual maximum of £1 million, you’ll qualify for Income Tax relief which will reduce your tax liability in the year of investment by a maximum of 30%. If you hold your investment for more than 3 years, then any capital gain generated is exempt.
Seed Enterprise Investment Schemes (SEIS)
Invest up to £100,000 per tax year in a start-up company that qualifies for the SEIS and you’ll attract Income Tax relief which will reduce your tax liability in the year of investment by a maximum of 50%. As with EIS, if the investment’s held for more than 3 years, any capital gain generated is exempt.
This isn’t an exhaustive list of ways to reduce how much Income Tax you pay as an individual. We can advise on and deliver a bespoke financial plan to help you get the most out of your income and assets.
Even if you’re no longer working, you still need to consider how much Income Tax you’re liable for, and the effect your decisions will have.
An important note: the value of investments can go up and down, so you may not get back what you invest, plus, tax treatment depends on individual circumstances and tax rules may change in the future. Content correct at time of publishing.