The new financial year is fast approaching, and, as usual, there are lots of changes afoot. The budget of November 2022 outlined the government’s plans to help stabilise the UK economy with a number of tax measures that impact both individuals and small businesses.
From April 2023, there are significant changes to corporate and personal tax, including the rise of Corporation Tax to 25% and reductions in capital gains and dividend allowances. The clock is ticking, and now is the time to take advantage of current allowances and plan ahead for your new tax position.
In this blog, we will summarise the key changes to UK tax in 2023 and examine the planning opportunities to help make the most of personal and corporate tax savings.
Spotlight Accounting always aims to take the guesswork out of accounting, and we offer a range of tax planning services to help our clients to bolster their businesses. For more information on our accounting services or to request a quote, please get in touch.
What will tax rates be in 2023 in the UK?
Thanks to the ill-fated mini-budget of September 2022, there has been much confusion and uncertainty over upcoming Corporation Tax changes, as well as changes to Income Tax, dividend tax rates and Capital Gains Tax rates.
At Spotlight Accounting, we always aim to demystify tax rules, so here is our guide on the changes you need to plan for at the end of this accounting period.
Personal Tax
What is changing?
Dividend tax
- The tax-free dividend allowance will drop from £2,000 to £1,000 in April 2023 and lower still to £500 in 2024. To look at an example:
- In 2022/23, a higher-rate taxpayer pays £2,700 dividend tax on a dividend income of £10,000 (taxed at a rate of 33.75% of their income, less the £2,000 dividend allowance).
- In 2023/24, the same higher rate taxpayer will pay £3,037 dividend tax on £10,000
- In 2024/25, the tax due rises to £3,206.
- These figures do not account for any potential tax threshold changes in that time. While ostensibly frozen until 2028, stranger things have happened.
Income tax
- Despite the u-turn made in the mini-budget, income tax will remain at 20% for a basic rate taxpayer, and the additional rate of 45% will remain in place.
- The threshold for the additional rate tax band will reduce to £125,140, pushing an estimated 250,000 higher rate taxpayers into this bracket.
- The tax-free personal allowance remains at £12,570 and will remain frozen until at least 2024/25 (which is a mixed blessing as it will not rise in line with salaries, meaning that most of us will still effectively be paying more tax.)
Personal tax planning opportunities
To make the most of your personal income in 2023, it’s essential to find ways to reduce your income to mitigate the increases in dividend and income tax. This is especially important for those that fall into the 60% tax ‘sinkhole’.
This phenomenon derives from the tapering of the £12,570 personal allowance at a rate of £1 for every £2 you earn above £100,000, which effectively means that some people pay 60% in income tax.
To minimise your liability, consider the following:
- Maximise your basic rate tax band for dividends to take advantage of lower income tax rates on dividend payments.
- Make the most of your tax-free interest allowance, e.g. charging interest on director’s loans.
- Reinvest any dividends over the new limit into other investments with potential returns, such as ISAs or pension funds.
- Pay more into your pension before the financial year end.
- Take your trivial benefits before year-end.
- Using both spouses’ basic rate tax bands.
- Couples who qualify for Child Benefits need to remember that they start losing the allowance once the highest earner earns over £50,000.
Maximise your pension Contributions
In order to make the most of your pension pot, consider the following:
- Are all your gift aid contributions recorded?
- Review your pension allowance – you can contribute £40,000 per year tax-free (unless your income is over £240,000 or your pension pot is below £1,073,100).
Capital Gains Tax
The significant reduction in the capital gains allowance was announced in the budget of November 2022. It is estimated that over 200,000 more people will be subject to Capital Gains Tax as a result, so it is wise to act swiftly to take advantage of the current allowance.
What is changing?
- The rate of Capital Gains Tax will remain the same – i.e., the basic rate of 18% for property sales and 10% for other assets and the additional rate of 28% and 20%, respectively.
- However, the tax-free allowance will drop from £12,300 to just £6,000.
- From April 2024, this will drop again to £3,000.
CGT planning opportunities
The most obvious way to save is to dispose of assets before your 2022/23 allowance expires.
There is also an opportunity to carry forward losses to 2024/5 when the exemption is reduced even further. Additionally, you could utilise your spouse’s capital gains allowance or make a gift of income-producing assets to save on tax.
The change to CGT exemption will impact landlords, in particular, who have already been hit hard by tax changes in recent years. They now face a much bigger CGT bill on property sales after April 2023, which, for many, will affect the capacity for business growth.
If you are a landlord, it’s wise to consult an accountant for property tax planning advice to see you compliantly and profitably into the new tax year.
National Insurance
What is changing?
- You have until 31st July 2023 to pay contributions for state pension gaps between 2006 and 2016.
- National Insurance rates are reduced by 1.25 % but are replaced with a Health and Social Care levy, so the effective amount paid will remain the same.
National insurance planning opportunities
To be eligible for a full state pension requires at least 30 years of National Insurance Contributions (NICs). If you are relying on a state pension, we urge you to check your NIC record and pension forecast ASAP. It’s essential that you pay for any gaps in your record before 31st July in order to retain your state pension entitlement.
From an employer’s point of view, if you are registered for PAYE and your National Insurance liabilities were less than £100,000 in the previous tax year, ensure you claim your 2022/23 employment allowance. This allows you to reduce your NI liability by up to £5,000.
Corporation Tax
As announced back in March 2021, Corporation Tax is set to rise from April 2023 (despite the decision to reverse this in the best-forgotten mini-budget of September 2022). Fortunately, there is some relief for smaller companies with the introduction of a ‘small profit rate’ and marginal relief.
What is changing?
- The main Corporation Tax rate is increasing to 25% for companies with a turnover exceeding £250,000.
- Companies with a profit of less than £50,000 will still pay Corporation Tax at the new ‘small profit’ rate of 19%.
- Companies with profits of between £50,000 and £250,000 will pay tax at 25% but with marginal relief.
- The profit threshold of £50,000 for the lower rate of Corporation Tax will be divided by the main company and the number of ‘associated companies’.
- The 130% Super Deduction ends on 31st March. For expenditure to qualify, costs must be ‘incurred’ on or before 31 March 2023.
- In good news, the annual investment allowance (AIA) of £1m will remain fixed in 2023.
Corporation tax planning opportunities
It goes without saying that companies must be ready for the increase in Corporation Tax. If your business falls between the small profit and the main rate, it’s important to find out if you are eligible for marginal relief.
Your accountant can help you to calculate the relief due to give you an accurate picture of how it affects your growth plans in the coming years.
The Super Deduction was introduced in 2021 to incentivise companies to invest in plants and machinery. It allows companies to reduce their Corporation Tax bill by up to 25% on qualifying capital expenditure. It is important to make any major asset purchases before the scheme ends in April 2023 to offset the planned rise in Corporation Tax.
Research and development
What is changing?
- To reduce abuse of the scheme, all claims are to be made digitally with pre-notification within 6 months of the end of the period to which the claim relates.
- With regards to enhanced expenditure, the SME additional deduction will decrease from 130% to 86%.
- The SME tax credit rate will reduce from 14.5% to 10%.
- To further incentivise R&D in technology, data and cloud costs will become allowable.
- To focus the relief on UK activities, overseas workers and subcontractors are no longer allowable costs (with some exceptions).
R&D tax relief planning opportunities
R&D tax relief is available to a wide range of activities, and, in our experience, a lack of awareness leads to many SMEs missing out on a lucrative opportunity.
If your business produces, adapts or develops a product or service you can’t ‘off the shelf’, then please get in touch as you could be eligible to make a claim.
For those regularly claiming R&D credits, it’s important to be aware of the changes to allowable costs. Your accountant can help you to calculate your R&D costs in line with the changes so that you remain compliant and maximise your claim.
Tax planning and support from Spotlight Accounting
UK tax is notoriously complicated, and the planned changes in 2023 (not to mention the to-ing and fro-ing at Number 11…) are enough to put anyone in a spin.
Fortunately, the team at Spotlight are bang up to speed with tax law, and we’re here to support you as this financial year draws to a close. As your dedicated accountant, we’ll highlight any tax changes that threaten your personal and business finances – and also those that represent an opportunity.
For more tax planning advice, please see our webinar on how to bolster your business. For a consultation, please contact us, and we’ll be in touch.
***Disclaimer this article was written before the Spring Budget on 15 March 2023, so is subject to change***
