3 easy ways to make the most of your unearned income allowances before April2023

8 December 2022

If you have been following the UK’s financial news, you will know already that it has been an interesting year to say the least.

Markets have continued to experience volatility with after-effects of the pandemic, the Ukraine war, and political U-turning all breeding uncertainty in the minds of investors. 

What’s more, the UK has had four chancellors this year: Rishi Sunak, Nadhim Zahawi, Kwasi Kwarteng, and now Jeremy Hunt – an unstable landscape to say the least.

In his autumn statement on 17 November 2022, Hunt attempted to steady the ship that had been somewhat rocked by Kwarteng’s mini-Budget, which threw markets into disarray two months prior. 

Alongside confirming the State Pension triple lock for 2023 and reducing the level at which you will pay additional-rate Income Tax to £125,140, the chancellor made two key cuts to unearned income allowances. He also froze another key band for a further two years – more on this later.

“Unearned income” is usually defined as income yielded from anything that is not a pension, a salary earned by an employee, or profits from running your own business – for example, returns from investments you hold, dividends, and inheritance.

Read on to find out about Hunt’s unearned income reforms, and how to make the most of your current tax-efficient allowances before it’s too late.

The chancellor cut the Capital Gains Tax annual exempt amount from April 2023

Capital Gains Tax (CGT) is usually paid on profits you earn from selling assets including:

• Personal possessions worth more than £6,000, such as art or jewellery
• Vehicles excluding your main car
• Properties excluding your personal residence, unless the home is very large
• Shares that are not in an ISA or PEP
• Business assets. 

Previously, former chancellor Rishi Sunak had frozen the CGT annual exempt amount – the amount you can earn in profits each tax year before you pay CGT – at £12,300 until 2026. 

Yet in his autumn statement, Hunt revealed that the exempt amount will actually be reduced to £6,000 in April 2023, then again to £3,000 in April 2024.

Indeed, CGT receipts already reached record highs in the 2021/22 tax year. According to MoneyAge, the total CGT liability increased by 42% from the previous year, with the number of gains rising by 19%. 

Following Hunt’s reduction in the exempt amount, this number is set to rise from April 2023 onwards – and if you have assets to sell, your tax-efficient allowance will be significantly lower than in the past few years.

Hunt reduced the Dividend Allowance starting from the 2023/24 tax year

In another key reduction of unearned income allowances, the Dividend Allowance (the amount you can earn in dividends before paying tax) will reduce from £2,000 to £1,000 in April 2023, then again to £500 in April 2024. 

So, if you earn dividends as a portion of your income, the bracket within which you pay no tax on these earnings will decrease this April, and decline even further in 2024.

If you are concerned about how the CGT or Dividend Allowance will increase your liability from the 2023/24 tax year onwards, contact your financial planner today.

The chancellor froze the Inheritance Tax thresholds for another 2 years

When you pass away, assets above a certain level, known as the “nil-rate bands”, are usually subject to a 40% Inheritance Tax (IHT) bill. 

In the 2022/23 tax year, the nil-rate band sits at £325,000. There is an additional £175,000 residence nil-rate band for property left to a child or grandchild. 

These bands were already frozen until 2026, but in his autumn statement, Jeremy Hunt fixed them at their current levels until 2028. 

IHT receipts have already increased in recent years. MoneyAge reports that between April and October 2022, HMRC’s IHT takings reached £4.1 billion – a £500 million increase from the same period in 2021.

Hunt’s move could mean your estate is subject to a higher IHT bill if you passed away while the bands are frozen.

3 ways to maximise your current allowances before they change

Fortunately, you still have time before these three allowances change. So, it could be prudent to utilise your current allowances before it’s too late.

Here are three ways to maximise your current tax breaks.

1. Speak with your financial planner about selling assets and maximising your Dividend Allowance

If you have investments you have been planning to cash in for some time, doing so while your CGT annual exempt amount remains at £12,300 could be beneficial. Bear in mind also that this is an individual exemption, so a couple could make gains of up to £24,600 in the 2022/23 tax year before any CGT is due.

That way, you can maximise your profits before the allowance reduces to £6,000 in April 2023.

Similarly, if you pay yourself dividends as a business owner, it is important to ensure your payments are up to date. 

If you usually pay dividends quarterly, it could be beneficial to review this with your financial planner and ensure all dividend income is up to date before the start of the new tax year.

2. Use your Dividend Allowance 

Just as you can’t carry forward a previous years’ CGT allowance, you must also use your Dividend Allowance in the current tax year. 

Especially if you are a business owner and pay yourself dividends, using this allowance before it reduces could be extremely constructive before the Dividend Allowance is cut in half.  

3. Discuss your estate plans with your financial planner now, not later

While the IHT bands are not decreasing, but rather staying the same for the next six years, it is still vital that you discuss your estate plans with a professional as early as possible. 

If inflation continues to rise, these freezes could have an even greater impact on your wealth until 2028.

You could mitigate the amount of IHT your beneficiaries pay by:

• Writing funds into trust for your spouse, children and grandchildren
• Gifting amounts of £3,000 or less to loved ones each tax year. You can also make larger gifts, but bear in mind IHT could be due if you die within seven years of making such a gift
• Drawing a retirement income from investments and savings before your pension, as your pension pot is not generally subject to IHT. 

To make a plan to avoid paying an unnecessarily high IHT bill while allowances are frozen, speak to your financial planner today.

Get in touch

For a conversation about maximising your unearned income allowances, email info@depledgeswm.com or call 0161 8080200.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate estate planning, tax planning or trusts..

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.