Frozen tax thresholds and a cut to the dividend tax allowance will see clients paying more tax in 2023, potentially leading to an increase in the number of Britons seeking financial advice.
According to calculations by Hargreaves Lansdown, the typical middle-income household is estimated to pay an extra £700 in tax this year.
The cutting in half of the dividend tax allowance will also see business owners and investors pay more tax.
The dividend allowance will fall from £2,000 to £1,000 in April, and will halve again the following year.
Business owners and investors will also be taxed at the higher rates introduced last April – 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
Investors could also be affected by the halving of the capital gains tax thresholds.
The capital gains annual allowance will be halved from £12,300 to £6,000 from April, before being halves again the following year.
Frozen income tax and National Insurance thresholds will also see those on higher incomes paying considerably more tax on salary.
The personal allowance has been frozen at £12,570, and the higher rate threshold has stuck at £50,270 since April 2021. With wages rising an average 6.1% over the past 12 months due to inflation, this means more tax will be coming out of clients’ pay packets.
The £100,000 level at which the personal allowance starts to be withdrawn has remained frozen. Meanwhile, the additional rate threshold has not moved from £150,000 since it was introduced in 2010, which already meant more people moving into the tax bracket through wage inflation.
However, from April it will fall to £125,140. It means anyone earning between the old threshold and the new one will lose an average of £621 a year and those earning over £150,000 will lose an average of £1,256. It is expected to make HMRC an extra £420m in the tax year starting in April.
The continued freeze in inheritance tax thresholds combined with higher house prices could also see clients paying more inheritance tax.
The inheritance tax nil rate band will remain at £325,000 and the residence nil rate band at £175,000 in the next tax year. Meanwhile, the IHT annual tax gift allowance is spending its fourth decade at £3,000. With average house prices rising £33,000 in the year to October, more estates will have more inheritance tax to pay.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said: “If 2022 hasn’t cured you of your cheerful optimism, 2023 will. Weighed down by a year of rate rises and double-digit inflation, leaving us nursing an £800 hit to our disposable income, we wade into a year of horrible tax rises estimated to cost a typical middle-income household £700 more.
“There are eight painful ways that we could end up paying more tax, so it’s worth taking steps to ensure we don’t end up paying more than our fair share.
“In the seven months to November, the amount of tax we paid was up almost 10% compared to a year earlier, with particular surges in stamp duty, inheritance tax, income tax and National Insurance.
“Unfortunately, this is just the beginning: and in 2023, we can expect taxes to soar again. For most people, the lion’s share of the rise will come from the freeze in income tax thresholds, but for investors, property owners and business owners, the tax attacks will come from all sides. It means we need to understand where the tax pressure will come from, and how to protect ourselves.”
The cost of living crisis and rising taxation could drive more people towards digital advice services according to Wealth Wizards.
Nick Hall, business development director at Wealth Wizards, said this provides Financial Planners with an opportunity to expand their brand.
He said: “Those individuals and families already receiving financial advice are going to be best placed to weather this two-year storm. However, those sitting in ‘The Advice Gap’ will be looking for help as they struggle with higher inflation, interest rates, cost of living and taxation. More and more people want to understand how today’s choices will affect their future finances.
“Financial advice groups, as well as assurers, banks and building societies are knowledgeable and trusted sources and therefore ideally positioned to offer help and guidance. This support is most efficiently and cost-effectively delivered through digital resources.”
He added that digital guidance services could be used to bring on new clients, with those with more complex needs being driven towards more traditional human-assisted financial advice services.
