Tax allowance freezes will hit mean Britons pay more tax this year

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Chancellor Jeremy Hunt announced in the Autumn Statement a series of tax freezes and allowance cuts that will hit many Britons in the pocket. Financial planning experts at Hargreaves Lansdown have detailed the eight ways Britons will pay more taxes in 2023.

Tax on pay – frozen income tax and National Insurance thresholds

The personal allowance, which is the amount a person can earn before they pay tax, has been frozen at £12,750.

The higher rate threshold, the point at which a person starts paying 40 percent tax on their earnings, remains at £50,270, as it has been since April 2021.

As incomes and salaries increase, more people will pass these frozen thresholds and see their tax bill increase.

Analysts predict by April 2026, the freezes will slash household incomes by £1,250 a year, with two thirds of adults paying income tax and 14 percent of people hit by the higher rate.

Wages have increased by an average of 6.1 percent over the past 12 months, meaning many people are already paying more tax.

Tax on pay for high income earners

Ministers also froze the £100,000 a year earnings threshold, after which the personal allowance is gradually withdrawn.

The threshold for the additional rate remains at £150,000 and this has not moved since it was introduced in 2010.

From April with the new tax year, it will fall to £125,140, meaning those earning an amount between the old and new thresholds will lose some £621.

A person who earns more than £150,000 a year will lose an average of £1,256, with the changes to provide an extra £420million in tax revenues.

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Tax on profits

Business owners face a tax hike in April when the dividend allowance falls from £2,000 to £1,000, with plans for this to halve again next April.

People will also be taxed at the higher rates introduced in April 2022, at 8.75 percent for basic rate taxpayers, 33.75 percent for the higher rate and 39.95 percent for the additional rate.

This will add to the pressure from rising energy bills and paying workers’ salaries, increasing the pressure on businesses.

Tax on investments

Investors will see their earnings hit by more capital gains tax, as the annual allowance is to be slashed from £12,300 to £6,000 this April, with the allowance to be reduced to £3,000 next year.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “Having invested diligently for the long term to build their financial resilience, it’s going to feel particularly unfair to be trapped by this allowance-cutting pincer movement.”

Council tax

Local councils can choose to increase council tax by up to three percent, with the option to add another two percent for social care, with no need for a referendum to approve the change.

With the rising cost of social care and National Insurance costs for council employee wages, Ms Coles warned local authorities will likely increase bills “as much as they can”.

The group warned the average Band D council tax bill could increase from £1,966 a year to as much as £2,064.

Tax on spending through VAT

Inflation is affecting the price of many everyday essentials, including energy bills and groceries.

With higher levels of tax on everyday expenses such as petrol and household goods, Britons will be paying more VAT on their daily needs.

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Property tax

House prices increased by 12.6 percent in the year to October 2022, meaning growing capital gains tax bills for homeowners who are selling up.

Ms Coles said: “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. With house prices already facing a significant correction, if even more potential sellers hang on, fresh paralysis could add further uncertainty to a highly sensitive market.”

Inheritance tax

Ministers have kept the inheritance tax (IHT) nil rate band at £325,000 for individuals, or £650,000 for couples. The residence nil rate band of £175,000 is also being retained.

With house prices increasing by an average of £33,000 in the year to October 2022, more inheritors are being hit by the tax.

IHT receipts hit a record high of £6.1billion in the financial year 2021/2022, with ever more families being hit by the 40 percent tax bill.

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