Seven ways to pay less tax in 2023

Alice Guy explains seven ways to minimise your tax bill and save income tax, capital gains tax and dividend tax in 2023. 

With more flip-flops on display than Love Island, 2022 was a whirlwind of political events. The shortest-serving prime minister in history, Liz Truss, introduced tax cuts in her autumn mini-budget. But political and economic chaos unfolded as market were unconvinced by her budget-busting plans.

We ended the year with yet another prime minister: one who not only reversed Truss’ tax cuts but went further with a series of tax rises, most of them due to hit in 2023.

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For individuals, although no headline tax rates will rise, a range of tax freezes and some reduced allowances means we’ll be paying more tax than ever for the next few years.

Here is a summary of the tax changes and seven ways you can save tax and keep more of your wealth in 2023.

Summary of changes

Income tax and National Insurance: income tax and National Insurance rules and thresholds remain the same until 2028. But the underlying tax we pay will increase significantly as tax thresholds lag behind inflation.

Known as “fiscal drag”, the freezing of the basic rate income tax and National Insurance threshold at £12,570 for another six years, and the higher-rate threshold at £50,270, means someone earning £50,000 will be paying 35% more tax by 2028, even though their wages only rise by 22%.

Capital gains tax (CGT): capital gains tax is payable on the profit you make when you sell or give away assets, excluding your main home. Currently, there’s a £12,300 annual CGT allowance you can deduct from any gains. But this allowance is reducing to £6,000 in 2023 and £3,000 in 2024. This means if a higher-rate taxpayer makes £20,000 chargeable gain on shares in 2024, they will owe tax of £3,400 (20% of £17,000) rather than the current £1,540 (20% of £7,700).

Inheritance tax (IHT): inheritance thresholds are also subject to fiscal drag. The £325,000 nil rate band has been frozen since 2009, while property values and inflation have risen significantly. This means that more of us will be paying inheritance tax when we pass on wealth to our family.

Dividend tax: the annual dividend tax allowance is also being reduced from £2,000 to £1,000 in 2023 and to £500 in 2024. This means that if you have a small share portfolio that pays a dividend income of £2,000, you’ll need to pay tax of £337 in 2023 and £506 in 2024, compared to no tax under the current rules.

Seven ways to save tax

With allowances reducing for capital gains tax and dividends tax, it’s never been more important to understand the tax rules and protect your wealth. Here are seven ways to protect your assets from tax rises and save tax in 2023.

1) Use your pension

Using your pension is one of the best ways to save tax. If you pay in through a workplace scheme, your contributions will be made before income tax, meaning that it only costs you £80 to pay in £100, and £60 to pay in £100 if you’re a higher-rate taxpayer.

If you pay into a private pension, then 20% tax relief is automatically added to your pot. Higher-rate taxpayers will need to claim back the extra 20% through their tax return or by writing to the revenue and asking for a rebate.

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Another less well-known tax saving is that dividends and gains are protected from capital gains tax and dividends tax if assets are held within a pension.

2) Use your ISA or Bed & ISA rules

Using your £20,000 per year ISA allowance is another great way to protect your wealth from the taxman. Shares held in an ISA are free from capital gains tax and dividend tax. It’s a big tax saving over time: a £100,000 share portfolio with a £4,000 dividend income would cost £1,181 in dividend tax every year from 2024.

Even if you hold shares outside an ISA, it’s possible to use Bed & ISA rules to transfer them into an ISA before the new tax year.

A Bed & ISA works by allowing you to sell assets and rebuy them within an ISA, if possible, using your capital gains tax allowance to avoid any potential CGT liability.

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Someone who sold assets with a capital gain of £12,000 in January 2023, and rebought them inside an ISA, could potentially save £1,200 worth of CGT, compared to selling them in 2023 (20% of £6,000).

Read more about how Bed & ISA works here.

3) Use or lose your CGT allowance

If you want to sell assets then it could make sense to sell them gradually, if possible, to make use of capital gains tax allowances.

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It’s especially worth using the CGT allowance before it reduces in April 2023, and again in April 2024.

4) Give lifetime gifts

Giving lifetime gifts can be a good way to reduce a potential inheritance tax bill.

It’s worth understanding the IHT rules as only around 4% of estates currently owe IHT, but that’s likely to increase in the future as the threshold remains the same and asset values rise.

Gifts that are given away within seven years of death, could end up still being counted as part of your estate. However, there are several ways to give away wealth and put those assets immediately outside your estate for IHT purposes: these would not usually be counted if you die within seven years of the gift.

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You’re allowed to give away up to £3,000 per year and put the gift immediately outside your estate for IHT purposes. You’re also allowed to give gifts out of your regular excess income (you’ll need to keep a record to prove gifts were from excess income).

Read here to find out more ways to give away wealth and potentially save IHT.

5) Use wealth in the right order

It’s worth thinking about the order you use your wealth to save tax.

Utilising annual capital gains tax allowances and ISA allowances can be a great way to bring down your tax bill.

Giving away wealth gradually, within the level of tax allowances could also mean you and your family get to keep more of your wealth.

If you’re lucky enough to have other assets as well as a pension pot intact, then it’s worth thinking about the order you use those assets. There is currently no inheritance tax due on a pension pot that is passed on through death.

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You’ll also get a free “uplift” on death for any assets with capital gains tax due. This means a big share portfolio that is inherited will “start again” with the purchase value counted as the value on the date of death.

6) Get married!

This won’t be for everyone, but it’s worth knowing that there are several ways the taxman treats married couples or civil partners preferentially.

Married couples can pass assets between them without owing capital gains tax, whereas CGT is potentially payable if unmarried partners give assets to each other.

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Married couples can also pass assets on to their spouse when they die without owing any inheritance tax, whereas IHT could be owed when unmarried partners pass on wealth.

The IHT nil rate band and residence nil rate band are effectively doubled up for married couples. This means married couples who are homeowners can usually pass £1 million free of inheritance tax.

7) Get advice

Tax rules are extremely complicated and there are many traps and exceptions to the rules.

If you want to preserve wealth and save tax, then it’s worth getting advice from a qualified solicitor or independent financial adviser (IFA). They’ll be able to review all your finances and give advice that’s tailored to your circumstances.