UK income tax rates 2023/24: maximising your tax-free allowance

When crafting an annual tax plan, for the vast majority of UK taxpayers, income tax considerations will play a pivotal role. In the 2023/24 tax year, this is especially true.

Income tax receipts as a proportion of GDP are at their highest level since the 1980s, and with an estimated 250,000 more taxpayers being forced into the 45% income tax band in 2023/24, this level is expected to rise further.

As a result, understanding income tax rates and how to minimise your exposure to them in 2023/24 and beyond - for high earners especially - can prove particularly beneficial.

What are the UK income tax rates for 2023/24?

The UK income tax rates for 2023/24 have remained the same as 2022/23, at 20% for basic rate taxpayers, 40% for higher rate taxpayers and 45% for additional rate taxpayers (except Scotland).

Though England, Wales and Northern Ireland's income tax rates have remained the same as 2022/23, not all of their income tax thresholds have.

Income Tax Bands in England, Wales and Northern Ireland
2022/23 vs 2023/24

As reflected in the table above, the personal allowance, basic rate threshold and higher rate threshold have remained the same, but the additional rate threshold has been reduced from £150,000 to £125,140.

Whilst Scotland has mirrored this reduction of its top rate threshold to £125,140, the nation's five-band income tax system shown below has noticed a greater extent of changes in 2023/24.

Income Tax Bands in Scotland
2022/23 vs 2023/24

How could this change impact taxpayers?

The reduced additional income tax threshold of £125,140, introduced for all UK nations in 2023/24, will have a particularly erosive impact on income for high earners.

Previously £150,000, the £24,860 reduction of the threshold has forced a further 250,000 taxpayers into the additional 45% tax bracket.

For individuals with an annual income of £150,000 or above, this change could have a considerably erosive impact on long-term earnings. 

*Incomes over £125,140 are not eligible for the personal allowance in the UK.

For example, a taxpayer in England, Wales or Northern Ireland with an annual income of £150,000, will in 2023/24 pay the 45% tax rate on an extra £24,860 of income. This change alone will result in an additional £1,234 in income tax.

Though this added liability may seem comparably small, over the course of a decade this change alone would lead to an extra £12,430 in income tax liabilities for an additional rate taxpayer (assuming current rates and thresholds remained unchanged).

Are there any allowances available to reduce my income tax liability in 2023/24?

In the UK, individuals can make use of several tax-free allowances each year. Spanning taxes from income tax to capital gains tax, utilising these together can help to minimise annual tax liabilities. Some of the most significant include:

• Personal allowance: in the UK taxpayers are entitled to a personal allowance, which is the level of annual income they can earn before they start paying income tax. For the 2023/24 tax year, the personal allowance is £12,570. For every £2 earned over £100,000, taxpayers lose £1 from their personal allowance (which is then taxed at the 40% rate). This means that all taxpayers with an income over £125,140 do not receive the personal allowance.

• Capital gains tax allowance: individuals can realise profits on the sale of assets such as shares and property up to a certain level each year free of capital gains tax. In 2023/24 this allowance is £6,000, having more than halved from 2022/23's figure of £12,300. This allowance is set to halve further to £3,000 in April 2024.

• Dividend allowance: individuals can earn up to £1,000 in dividends annually – free of dividend tax – as of the 2023/24 tax year. This allowance was halved from 2022/23's figure of £2,000 and is set to be halved again to £500 in April 2024.

• ISA allowance: the level of capital an individual can contribute to an ISA each tax year without paying tax on interest, dividends or capital gains is £20,000 in 2023/24. This can be split across four types of ISAs – Cash ISAs, Stocks and Shares ISAs, Innovative Finance ISAs (IFISAs) and Lifetime ISAs – or allocated solely to one ISA.

Which reliefs & schemes can I use to minimise my income tax liability in 2023/24?

Alongside the tax-free allowances individuals can make use of, a number of reliefs and schemes can be accessed to further minimise income tax liabilities.

With tax-free allowances being gradually reduced and cut by the UK government – for high earners especially – understanding how to make use of these tools is becoming increasingly essential.

1. Enterprise Investment Scheme (EIS)

The Enterprise Investment Scheme (EIS) is a tax efficient venture capital scheme that offers individuals a generous range of tax incentives when investing in early-stage companies.

One of the most attractive tax incentives offered by the EIS is 30% income tax relief. This relief enables an investor to claim back up to 30% of the sum they invest into the EIS from their income tax bill of the current or previous tax year.

With the annual EIS investment maximum standing at £1 million in 2023/24 (or £2m should everything over £1m be invested into knowledge-intensive companies [KICs]), this can enable taxpayers to claim annual income tax relief of up to £600,000.

2. Seed Enterprise Investment Scheme (SEIS)

The Seed Enterprise Investment Scheme (SEIS), is the 'younger sibling' of the EIS. Introduced in 2012, it facilitates investment specifically into especially early-stage startups, and in turn, offers investors even more generous tax reliefs to offset the added risk this can bring.

The headline SEIS tax incentive is 50% income tax relief on the amount invested (up to £200,000 annually, following changes that came into effect in April 2023).

Alongside this income tax relief, the EIS and SEIS offer investors capital gains tax exemption, capital gains tax deferral/reinvestment relief, inheritance tax exemption and loss relief. For individuals with considerable tax bills, this can make the schemes especially attractive in 2023/24.

3. Venture Capital Trusts (VCTs):

VCTs are investment trusts that pool investor capital to invest in a collection of small to medium-sized companies on the investors' behalf and with the advantage of several added tax reliefs.

VCTs offer 30% income tax relief up to a maximum investment of £200,000 per year, though their tax advantages are not as extensive as those of the EIS and SEIS.

Whilst they can play a role in reducing income tax, the added fund fees, less significant target growth and less autonomy over investments VCTs are associated with can make them less attractive to certain experienced investors.

4. Individual Savings Accounts (ISAs):

Individual Savings Accounts (ISAs) allow investors to save and/or invest money without paying tax on any interest or capital gains earned.

The annual ISA allowance for the 2023/24 tax year is £20,000. Investors can allocate this allowance across the full ISA family, including the Cash ISA, Stocks and Shares ISA, Innovative Finance ISA and Lifetime ISAs.

5. Pension Contributions:

In the UK, income tax relief is available on contributions to pension schemes. Basic-rate taxpayers can receive 20% tax relief, while higher-rate and additional-rate taxpayers can receive 40% and 45% respectively.

Investors can contribute up to 100% of their earnings to a pension scheme, subject to an annual allowance of £60,000 for the tax year 2023/24.

Individuals looking to invest using their pension can make use of an additional range of tax advantages via both personal schemes and occupational schemes set up by employers. Popular examples of these include Self Invested Personal Pensions (SIPPs) and Small Self Administered Schemes (SSAS).

Forming an income tax plan in 2023/24 and beyond

The routes an investor follows when structuring their tax plan will largely depend on individual circumstances. However, as income tax rules tighten and tax-free allowances decrease, income tax-mitigating routes are likely to play an increasingly important role in tax plans.

Where for some individuals, making use of the UK's tax-free allowances will suffice, those with more considerable income tax bills may seek additional tools for minimising income tax liabilities.

From tax efficient investment options such as the EIS and SEIS that boast particularly generous income tax reliefs, to pension schemes such as SIPPs and SSASs that provide added tax advantages on pension contributions, the most appropriate route will vary from taxpayer to taxpayer.

In turn, ensuring individuals remain updated with recent tax changes and the range of tax efficient tools at their disposal will prove an increasingly crucial priority when income tax planning in 2023/24 and beyond.

GCV Invest is an FCA authorised co-investment platform and private investor network. We do not offer financial or tax advice. Individuals should seek professional advice from a qualified adviser prior to investing.