45% tax threshold reduced from £150,000 to £125,140 from April 2023

July 10, 2023|In KRW Tax news|By Keith Witchell

In the Spring Budget, Chancellor Jeremy Hunt announced that the additional rate threshold for income tax would be reduced from £150,000 to £125,140 from April 2023.

Let’s start with some context.  Prior to this change, the following income tax rates applied:

Effective tax rateOn incomeCumulative
0%First £12,570£12,570
20%Next £37,700£50,270
40%Next £49,730£100,000
60%*Next £25,140£125,140
40%Next £24,860£150,000
45%Everything else£150,000+

*a 60% tax rate does not actually exist, but this is the impact of losing the personal allowance once income exceeds £100k per annum

A few more caveats/disclaimers:  Different tax rates apply to dividend income, and the above assumes that no personal pension contributions or gift aid donations are made.

So, what’s changed?  From April 2023, we no longer have the additional £24,860 band of income (from £125,140 to £150,000) which is taxed at 40%, with the additional 45% tax rate now applying to all income over £125,140.  This can mean (up to) £1,243 more income tax to pay per annum.

Prior to this change, where business owners had income over £100,000 per annum we used to always advise them to try and push it to £150,000 per annum so that they start to dilute the impact of the nasty 60% tax rate that kicks in for income between £100,000 and £125,140 per annum.  Our philosophy was that it was better to earn £100,000 one year and £150,000 the next, as opposed to £125,000 in both years, so that the 60% tax rate was avoided every other year.  This income tax planning tip is still valid, just with 45% tax now applying to part of the income in the higher income year.

Is there anything you can do to mitigate it?  The simple answer is pensions!  Anyone earning between £100,000 and £125,140 per annum should look at making pension contributions, as they will be able to obtain 60% tax relief on their pension contributions that fall into this bracket.  The same applies to those earning over £125,140 per annum, as pension contributions will attract 45% tax relief, which is well worth having.  Although care will be needed if annual income exceeds £260k as the annual allowance for making pension contributions then begins to taper down.

What other steps could you take to minimise the impact?  For those employed then options are limited, although salary sacrifice arrangements for an electric car can be very tax efficient for those earning over £100,000 per annum as the tax savings can be significant.

For business owners the focus is usually on family income, for example, making a basic rate tax paying spouse a shareholder in the company, to help minimise exposure to the higher tax rates as a couple.  Other regular recommendations include moving towards tax efficient company cars, and the use of holding companies to make investments, both of which can often reduce the level of income needed from the business, and bring you back below the key higher tax rate thresholds.

For more information or help with planning to avoid the 45% tax rate, then please contact me.

Key Facts

  • Additional tax rate threshold reduced from £150,000 to £125,140 from April 2023
  • 45% tax now applies to income over £125,140, or 39.35% for dividends
  • The loss of personal allowance happens between £100,000 and £125,140, meaning 60% tax
  • Investing in pensions is the simplest way to mitigate the impact of these higher tax rates
  • Salary sacrifice electric car schemes are also effective, with more options for business owners

For further advice on this matter, please contact me.

Keith Witchell