New tax year: with Britons facing £4,500 extra cost, we explain how to save

interactive investor explores key personal finance considerations.

6 April marks the start of a new tax year, which holds a host of changes and developments affecting personal finances.

New calculations by interactive investor, the UK’s second-largest direct-to-consumer investment platform, show that average Briton faces an additional £411 in costs this month, rising to £4,569 over the new tax year.

This takes into account mortgage costs, energy costs, income tax and National Insurance rises, as well as council tax. Meanwhile, renters face an additional £141 in costs this month, rising to £1,327 over the new tax year.

Costs increases from April 2023

Source: interactive investor

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “As keeping on top of rising prices remains a daily battle for many, the new tax year personal finance considerations can easily be missed. But being in the know of the changes afoot and taking full advantage of all the tax breaks and support available, so that you don’t pay more than you need to, could help bolster your financial resilience for the short and longer term.

“While inflation is forecast to cool significantly in the second half of the year, the surprise increase in inflation in February is a painful reminder that the economic script isn’t always followed. As such, hoping for the best and preparing for the worst remains a diligent approach to finances.”

interactive investor explores some of the key considerations for the new tax year.

Mortgage costs set to rise for 1.5 million households

Alice Guy, Head of Pensions and Savings, interactive investor, says: “Most UK mortgage-holders are still counting down to the nasty but inevitable movement when they need to re-mortgage, and a painful 1.5 million households will see their fixed-rate mortgage deals finish this year and 1.6 million more households during 2024.

“Someone with a £200,000 mortgage, who’s nearing the end of their fixed-rate deal will have to dig deep and find another £303 per month in interest, that’s assuming they were on the average two-year fixed-rate deal in 2021 and move on to a similar deal in 2023.

“If you are nearing the end of your deal then it’s worth shopping around and not necessarily accepting the first offer. If you’ve still got a few months to go, you can usually hold on to your mortgage offer for several months before signing on the dotted line. Many experts expect mortgage rates to drop slightly later in the year, so you may be able to get a better deal nearer the time.”

Middle earners set to pay £398 more in tax because of fiscal drag

Myron Jobson says: “The big freeze in the income tax personal allowance (£12,570) and the point at which people start paying higher tax rates until 2028 means that millions of taxpayers are likely to be pushed into higher tax bands as inflation affects their wages and income. Known as ‘fiscal drag’, this is the ultimate stealth tax which feels particularly tough at a time when so many people are struggling to keep up with rising prices.

“Our calculations shows that someone earning £30,000 is set to pay £398 more in tax this tax year because of fiscal drag – i.e., than if the personal allowance (£12,570) had been indexed in line with OBR forecast inflation for tax year ended Apr 2023 (9.9%).

“The freezing of income tax threshold and other personal allowances has bolstered the allure of paying into a workplace pension through salary sacrifice. This arrangement allows employers to reduce employees’ salary and pay the equivalent amount as pension contributions. Basic-rate taxpayers get 20% pension tax relief, turning a £80 contribution to £100. If you are a higher-rate taxpayer, you could reclaim an additional 20% tax on your pension contributions, for a total of 40% tax relief.

“Think of a pension as deferred income and this seems like a good way to reduce your overall NI bill without reducing your income, if you are happy to take it after age 55 instead.”

Maximise pension contributions

Alice Guy says: “Last week’s decision on the state pension age only delays the inevitable and many middle-aged workers could have to wait until 69 or 70 before reaching their state pension age. It’s a stark reminder of the importance of private pension saving, especially if we want to retire before the state pension age and therefore will have a hole to plug.

“Budget changes to pension allowances mean you can pay up to £60,000 into your pension, up from £40,000, depending on your income, and up to £10,000 if you’ve already started taking taxable income from your pension. And cuts to the capital gains tax and dividend tax annual allowances, also make pension saving even more important to shelter your wealth from the taxman. You can use Bed and SIPP rules to sell funds or shares held outside your pension and rebuy them within your pension.

“The new tax year is a good time to take stock of your pension. Check your latest pension statement and state pension age to see if you’re on track. If you can afford it, then consider contributing more than the automatic enrolment amount to your workplace pension or contributing an additional amount into a SIPP or private pension. Contributing the minimum 5% of your salary could mean your pension income falls short and you don’t have enough for a comfortable retirement.

“Consider consolidating old pension pots to make the most of your pension savings. Some pots have more expensive fees than other and even small charges take a big bite from your investment growth and could seriously put a dent in your pension wealth over time.

“Most importantly, keep on regularly investing and don’t be put off by stock market volatility. It’s completely normal for share prices to move significantly and it’s not a problem if you’re a long-term investor. Even small contributions add up over time and it’s better to invest even a small amount and then hopefully increase it as you can afford it.”

Maximise ISA allowance

Myron Jobson says: “The ISA allowance remains at £20,000 for the 2023-24 tax year. While 11 consecutive base rate hikes have lifted cash ISA savings rates from the doldrums, investing via a stocks and shares ISA is likely to remain the best long-term option for ISA savers. While past performance is not indicative of future results, stock market-based investments have a rich history of producing returns that trump cash savings interest and inflation. The key is diversifying investments across sector and regions.”

“There are no limits to the number of ISAs you can have, but, crucially, you can only open and contribute to one of each type of ISA each tax year. So, you can have two stocks and shares ISAs, but you can only contribute to one in each tax year. You can transfer an ISA at any point in the year, but you would need to arrange for a transfer rather than selling and reinvesting to preserve your tax benefits and annual allowance. If you have multiple numbers of stocks and shares ISAs, bringing them all under one roof is convenient and can also save you money in the long run as some providers charge more in custodial and investment fees than others.”

Don’t forget your children

Myron Jobson says: “The current maximum amount you can put into a Junior ISA (JISA) each tax year is £9,000. That means a family of four can shelter £58,000 each year from the taxman. That is a sizeable chunk of money that could snowball into an impressive amount, turbocharged by the wonders of compounding.

“For example, £58,000 invested would yield a return of £14,279 over five years rising to £32,072 over 10 years assuming a 5% annual return and yearly fees of 0.5%. While investment returns are never guaranteed, the example illustrates the potential benefits of investing for the whole family – and benefits of doing so through an ISA wrapper is indisputable.”

High Income Child Benefit charge net widening

Myron Jobson says: “The freeze in the £50,000 threshold at which parents can claim full child benefit in tandem with an increase in earnings means that more parents will get caught in the High Income Child Benefit charge net this tax year.

“Child benefit is worth £21.80 per week (over £1,133.60 a year) for the first child and £14.45 a week (over £751.40 a year) for each subsequent one at present. If you or your partner has an adjusted net income (total taxable income minus certain tax reliefs, for example pension contributions) exceeding £50,000, child benefit payments are reduced and withdrawn entirely if your income is more than £60,000. That means a parent earning £60,000 with two children has to pay back a total £1,885 every year.

“The rule also bafflingly leaves child benefit payments out of reach if just one parent earns above the £50,000 threshold but does not apply if both parents earn just below the threshold – or if one partner doesn’t work at all.

“Those with private pensions could save more by making additional contributions through tax rebates

“Our calculations show that a parent earning £53,000 paying 5% (the minimum employee pension contribution under automatic enrolment rules) of their income (£2,650) into their workplace pension could contribute an additional £350 to their pension to bring their taxable income down to £50,000 (£2,650 minus £350). In this scenario, parents with two children could potentially save a total of £566 in child benefit, with net cost of top up pension contribution of £198 (pension contribution £350, tax saved £86, child benefit saved £66). When factoring the pension tax relief and the Child Benefit savings, the pension contribution is effectively boosted by 77%.”