Crossing the Threshold

When your total income reaches certain levels, it tips any extra income into a higher tax band. This can also mean you lose part or all of your personal savings allowance (PSA), personal allowance (PA) or pensions annual allowance.

Taxpayers who live in Scotland have slightly different tax thresholds but the principle is the same.

Although the rates of income tax on earnings and dividends are not changing on 6 April 2023 and most tax thresholds are frozen, you may be able to save tax by moving income from 2022/2023 to 2023/2024. You could also save by making certain payments in 2022/2023 rather than in 2023/2024.

Say you are a 20% taxpayer in 2022/2023 but expect that a lump sum termination payment due in March 2023 will tip you into the 40% band (over £50,270). If you ask your employer to delay paying the termination payment until after 5 April 2023, you’ll pay the tax on that income later. You will also retain all of your 2022/2023 £1,000 PSA and may still stay out of the 40% band for 2023/2024. The main thresholds for 2022/2023 are:

• PA: £12,570 – basic rate tax (20%) starts
• Higher rate threshold: £50,270 – 20% rate increases to 40% and PSA reduces from £1,000 to £500
• Married couples: transfer of £1,260 of PA is possible where the higher earner has income up to £50,270
• Child Benefit clawback: income between £50,000 and £60,000
• Withdrawal of PA: income between £100,000 and £125,140
• Additional rate threshold: £150,000 (£125,140 for 2023/2024) – 40% rate increases to 45%, PSA removed
• Pension annual allowance reduced where income (including employer pension inputs) above £240,000

Income that can easily be moved from year to year includes:

• bonus from your own company
• dividends from your company
• encashments of life assurance bonds
• withdrawal of taxable income from pension schemes in ‘drawdown’.

The information in this blog provides only an overview of HMRC guidance and legislation in force at the date of publication and no action should be taken without consulting the detailed HMRC guidance and legislation or seeking professional advice.  Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this blog can be accepted by the firm.