How Recent Tax Changes Affect Your Income Tax Refund in the UK 

With the recent tax changes in the UK, effective from April 6, 2024, understanding their potential impact on your finances is essential. These changes could influence your income tax refund, depending on your earnings and financial situation. In this blog, we will break down the key changes and how they might affect your tax refund UK, so you can stay prepared.

Impact of Recent Tax Changes on Your UK Tax Refund

1. National Insurance Cuts

• Changes: The main rate of employee National Insurance has been reduced from 10% to 8%, while the self-employed rate has dropped from 9% to 6%.

• Effects: This reduction means lower deductions from your salary or self-employed income, potentially increasing your income tax refund. Since you’ll be contributing less to National Insurance, more of your earnings will be retained, which can lead to a higher refund when filing your tax return.

2. Capital Gains Tax Allowance Reduction

• Changes: The £12,300 capital gains tax allowance has been lowered to £6,000. This allowance refers to the amount of profit you can make from selling assets (like stocks or property) before paying tax.

• Effects: With a lower allowance, more of your capital gains could be subject to tax, which may reduce your tax refund UK. If you have significant investments, this change could increase your tax bill, meaning less of your money is returned in the form of a refund.

3. Dividend Allowance Reduction

• Changes: From £1,000 to £500, the dividend allowance has been cut in half. This is true for money received as dividends from investments.

• Effects: This reduction means you may pay more tax on your dividend income, which could lower your income tax refund. For those relying on dividends as a significant source of income, this change could have a noticeable effect on your overall tax liability, reducing any potential refund.

4. Frozen Income Tax Thresholds

• Changes: The income tax thresholds have been frozen, meaning the bands that determine how much of your income is taxed have not been adjusted for inflation or earnings growth.

• Effects: As your income increases, you might move into a higher tax bracket without a corresponding increase in the thresholds. This could result in more of your income being taxed at higher rates, reducing the size of your tax refund UK. This “fiscal drag” can affect many taxpayers over time.

5. Higher State Pension and Child Benefit Rates

• Changes: There have been increases in state pension and child benefit rates, which are forms of taxable income.

• Effects: If these benefits push your total income above certain thresholds, they may reduce your income tax refund. While the increase in these benefits provides extra income, it may also raise your overall taxable earnings, leading to a smaller refund if you exceed tax limits.

6. Personal Savings Allowance Adjustments

• Changes: There have been no increases to the personal savings allowance, which remains at £1,000 for basic-rate taxpayers and £500 for higher-rate taxpayers.

• Effects: As interest rates rise, more of your savings interest may become taxable, potentially reducing your tax refund. With higher earnings from savings but unchanged allowances, more interest could be taxed, leaving less room for refunds. 

7. Lowering of Annual Pension Allowance 

• Changes: The annual pension allowance, which caps tax-free contributions to pension plans, has been reduced from £40,000 to £20,000 for high earners.

• Effects: This change could mean less tax relief on pension contributions, impacting refunds for those who save significantly for retirement. For higher earners, this could result in a tax liability and a smaller refund when excess contributions become taxable. 

8. Corporation Tax Increase for Higher Profits 

• Changes: Corporation tax for companies with profits over £250,000 has increased to 25%.

• Effects: Self-employed individuals who are shareholders in their companies may see a reduction in personal refunds if profits lead to a higher corporation tax bill. Higher corporation taxes mean less retained income and, in some cases, a lower individual tax refund due to adjustments in income and dividends.

9. Reduction in Marriage Allowance Transfers 

• Changes: Marriage Allowance, which lets one partner transfer up to £1,260 of their personal allowance to their spouse, has stricter eligibility criteria.

• Effects: Couples may be able to transfer less of their allowance, reducing the possible tax benefit and resulting in a lower refund. For couples with one lower earner, this could impact tax liability and reduce refund potential. 

10. Lower Relief for Buy-to-Let Mortgages 

• Changes: Mortgage interest relief for landlords has been limited to the basic tax rate, restricting previous deductions for higher-rate taxpayers.

• Effects: Reduced relief could increase rental income tax bills, which might lower your tax refund if you own rental properties. Landlords who previously received a tax reduction on mortgage interest now face potentially higher tax costs, impacting their net refund.

Conclusion:

National Insurance cuts might boost your refund, while reductions in capital gains and dividend allowances, along with frozen tax thresholds, could lower it. Understanding how these changes impact your finances will help you prepare for tax season and potentially maximize your tax refund.

For expert guidance on your tax refund UK, Meru Accounting can assist you in navigating the new tax landscape. Our professional tax and accounting services ensure that you make the most of available deductions and credits to optimize your refund.