With personal allowances frozen for another year, despite increases in benefits, state pensions and interest, you may now find yourself in a taxable position or with a higher tax liability.
The state pension is set to a ‘triple lock’ which means that the state pension you receive increases in line with inflation and this was set at 10.1%. Therefore, a higher state pension will be received by many from April 2023.
Your state pension does not have tax deducted from it before it is paid to you as it uses your tax-free personal allowance. For the current tax year (2023/2024), this has been frozen and remains at £12,570 per person, per annum. Therefore, you will notice that most of your personal allowances is used up by your state pension.
If you receive a private pension in addition to your state pension, you may receive a new tax code notice and you may notice that your amount received from your private pension is now lower than before. This is the effect of the increase in your state pension and the freezing of the personal allowances.
In addition, we need to consider our bank interest. As interest rates have been rising in the last year, our interest received has also been increasing. As someone with money earning interest, you may have received more in the previous tax year (to April 2023) and more in the current tax year (to April 2024).
The allowance known as personal savings allowance has also been frozen at £1,000 if you are a basic rate tax payer (pay tax at 20%), at £500 if you are higher rate tax payer (pay tax at 40%) and £0 if you are an additional rate tax payer (pay tax at 45%). If you have earned interest more than these allowances, you may need to pay tax on this additional interest. Remember that interest earned in an ISA is tax free and so if you are not maximising your ISA allowance, consider doing that now.
If you do not do a self-assessment tax return but think you may need to pay tax, we suggest you seek professional advice. HMRC may send you an income statement that shows money you have earned and you may find that they then ask you to pay a tax bill. They will notify you of the tax to be paid, as well as how and when to pay it by.
HMRC are informed of income received from a private pension by your provider, as well as interest received from your banks, building societies and brokers. However, always check these figures are correct before simply accepting HMRC’s figures.
Be aware that some of the tax-free allowances are going down from April 2023 and so please do plan your finances in advance.
Some of the allowances going down from April 2023 are as follows:
- Dividend allowance at 0% being reduced from £2,000 to £1,000
- Capital gains annual exemption is being reduced from £12,300 to £6,000.
As an individual it is your responsibility to ensure you pay the right amount of tax.
Please always seek professional advice before taking any action. We are happy to answer questions in future issues. Please send your questions through the contact us page on our website: www.champconsultants.co.uk
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