Last Thursday the Chancellor announced further tax changes, including the freezing of tax thresholds for an additional two years to April 2028
Here is a summary of the main announcements that may affect you:
- Income tax personal allowance of £12,570 and higher rate threshold of £50,270 frozen until April 2028
- Main national insurance thresholds to stay at current levels until April 2028 – employee NI payable on salary over £12,570, employer NI payable on salary over £9,100
- Inheritance tax thresholds frozen until April 2028 – IHT nil rate band £325,000, residence rate band £175,000
- Employment Allowance maintained at £5,000 until 2026
- National Insurance (NI) rates revert to 2021/22 levels from 6 November 2022 – employee NI reduces from 13.25% to 12% on salary up to £50,270 (down from 3.25% to 2% thereafter) and employer NI reduces from 15.05% to 13.8% on salary over £9,100
- The Health and Social Care Levy tax originally planned from April 2023 has been cancelled
- Annual capital gains exemption reduced from £12,300 in 2022/23 to £6,000 in 2023/24 and £3,000 in 2024/25
- Dividend allowance reduced from £2,000 in 2022/23 to £1,000 in 2023/24 and £500 in 2024/25
- Dividend tax rates will remain at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers
- Additional-rate income tax threshold lowered from £150,000 to £125,140 from April 2023
- Lifetime pension allowance (the amount you can save in a pension plan without incurring a charge) is frozen at £1,073,100 until 2026
- The state pension will increase in line with inflation by 10.1% in April 2023 – an additional £870 for those who receive the full state pension
- Electric cars will need to pay Vehicle Excise Duty from April 2025
- Benefit in kind percentages will increase in 2025/26 by 1% for electric and ultra-low emission cars emitting less than 75g of CO2 per kilometre, a further 1% in 2026/27 and a further 1% in 2027/28, up to a maximum of 5% for electric cars and 21% for ultra-low emission cars
- Corporation tax will increase to 25% from 1 April 2023 for companies with profits of £250,000 and over. Small companies with profits up to £50,000 will continue to pay corporation tax at 19%. Those with profits between £50,000 and £250,000 will pay tax at a tapered rate, which works out to be a marginal rate of tax of 26.5% on profits between this range
- The temporary lowering of Stamp Duty thresholds will cease on 31 March 2015
Be aware of the thresholds and your total income each tax year
The freezing of thresholds and lowering of the additional rate band, mean that more people are likely to fall into higher tax brackets over the next 5 years. You should keep in mind the relevant tax brackets for total income each tax year; the lower rate band remains static at £50,270 and the additional rate band will be £125,140 from April 2023. Those whose total income is approaching £100k need to be aware that they will start to lose their personal allowance on the income that falls between £100k and £125k, which means the effective tax rate on income falling within this band is 60%, and then 45% on income over £125k. Making a personal pension contribution or GiftAid donation could save you paying tax at a higher rate because these reduce your ‘adjusted net income’ which is the amount that is considered for the thresholds. Therefore, you should be mindful of the timing of these payments and ensure you utilise them in the most efficient tax year where possible.
Salary in 2023/24
The thresholds after which you will pay employee NI and employer NI from April 2023 are expected to remain at £12,570 and £9,100 respectively. If you prefer not to pay any employer NI, and assuming you do not qualify for claiming the employment allowance, then a salary of £9,100 would be the level to pay in the new tax year.
However, the optimum salary to pay yourself is likely to be £12,570, rather than £9,100. Whilst you will be liable to pay some employer NI, this will be offset by corporation tax savings. If your profits are higher than £50,000 then the savings increase due to the extra saving of corporation tax:
Employer NI payable £12,570 – £9,100 = £3,470 @ 13.8% = £479
Corporation tax saving £12,570- £9,100= £3,470+479= £3,949 @ 25% = £987 or @ 19% = £750
Overall saving from paying salary of £12,570 rather than £9,100 is £987 – £479= £508 if corporation tax is payable at 25%, or £750 – £479= £271 if corporation tax is payable at 19%
We will provide updated advice on salary levels for 2023/24 in March 2023.
Corporation tax rate
Currently companies pay corporation tax at 19% regardless of their size. From 1 April 2023, this rate will increase if profits exceed £50,000. For profits between £50,000 and £250,000, there will be an effective marginal rate on this band of 26.5%, and if profits exceed £250,000 then the whole amount will be taxed at 25%.
The bands of £50,000 and £250,000 limits are reduced if a company has associated companies or an accounting period of less than 12 months.
If your company accounting year end is 31 March, then planning of things like expenditure is straight forward because profit in the year to 31 March 2023 will be taxed at 19% and then the new rates will apply from 1 April 2023 onwards. For companies with different year ends the profit will be apportioned on a time basis to create pre and post 1 April 2023 profit periods, which will be charged at the relevant rates that apply to those. Therefore, in some cases it may be beneficial to consider changing a year end or shortening an accounting period. This might be the case if you were expecting an unusually high level of income, or making a large investment disposal, prior to 1 April 2023, to avoid the profits being time apportioned and partly charged at a higher rate. Please contact us to discuss if relevant.
Dividend allowance reducing to £1,000 in 2023/24
Make sure you utilise the £2,000 dividend allowance in 2022/23 where possible. Dividends from your company need to be paid by 5 April 2023 to fall into this tax year.
Super-deduction capital allowance
There is currently a temporary super deduction of 130% available on capital expenditure. This is on assets used in the business, such as computers, laptops, and office furniture, which generally qualify for capital allowances. The items must be brand new and purchased between 1 April 2021 and 31 March 2023 to qualify for the new super-deduction (cars are excluded). For an asset cost of £2,000 this will currently provide an additional tax saving of £114. If you consider that your business will continue to pay corporation tax at 19% (profits below £50,000) then it would be worth considering purchasing any assets before the end of March 2023. However, if your company is expected to make profits exceeding £250,000 next year, then you will likely save more tax by delaying the expenditure and getting corporation tax relief at 25% rather than at the current rate of 19%.
Capital gains tax threshold reducing to £6,000 in 2023/24
The annual allowance (the amount on which you pay no capital gains tax) is reducing from £12,300 to £6,000 in 2023/24. Therefore, you may wish to crystallise any large personal capital gains by 5 April 2023.
If you were thinking of closing your company, and have reserves of more than £6,000, please contact us to discuss whether it would be beneficial to close now. The maximum potential tax saving from closing your company in 2022/23 rather than in 2023/24 due to this change is £1,260, but the actual saving depends on what percentage shareholding you hold and what rate of tax you will be liable to pay.