Tax rises coming in April - take action now
What tax changes are happening from April 2023?
Personal Taxes
Starting from April 6th, 2023, the UK is making changes to income tax rules. This means that people who earn more than £125,140 per year will have to pay a higher tax rate of 45%. Before, the limit was £150,000. This change will affect people in England, Wales, and Northern Ireland.
In Scotland, there will also be changes to income tax rates from April 2023. People who earn more than £125,140 per year will have to pay a higher tax rate of 47%. This is because the top tax rate in Scotland will be lower than the rest of the UK. Before, the limit was £150,000. People in the rest of the UK will continue to pay a top rate of 45% and a higher rate of 40%.
Tax tip – pension + charitable donations
Suppose you earn between £100,000 and £125,140, your effective tax rate might increase to about 60% because your personal allowance will drop by £1 for every £2 you earn over £100,000.
But there are ways to reduce your tax liability. You can make personal pension contributions or donate to charities. For instance, a basic rate taxpayer can save £100 into their pension plan, but only pay £80. A higher rate taxpayer can save £100 for just £60 (£58 in Scotland), and an additional rate taxpayer can save for only £55 (£53 in Scotland).
However, you should keep in mind certain considerations before taking action. There are limits to how much you can save into a personal pension, so it's essential to review your situation beforehand.
Additionally, you may require investment advice from a registered pension adviser. We can help put you in touch with a trusted financial adviser, please get in touch.
Dividend allowance is being reduced over the next two years
Every year, people receive a dividend allowance, which is a tax-free profit they can take from their business. However, from April 2023, the dividend allowance will decrease from £2,000 to £1,000. It will then drop again to £500 by April 2024.
If your dividends are above the dividend allowance, your tax rate depends on your income tax band. From April 2023, the following rates will apply:
Basic rate taxpayers will pay a rate of 8.75%
Higher rate taxpayers will pay a rate of 33.75%
Additional rate taxpayers will pay a rate of 39.35%.
A freeze on tax thresholds
The freeze of different tax allowances until 2028 will impact many taxpayers who earn lower incomes, leading to higher income tax bills due to inflation.
Basic rate taxpayers will also be affected because the income tax personal allowance will remain at £12,570 until 2028. This means that a larger part of their income will be taxed.
Tax tip - transfer your assets by gifting
Transferring income-generating assets to your spouse or civil partner as a gift can potentially save you tax. However, it's important to seek professional advice and ensure that you meet the conditions.
Additionally, basic rate taxpayers may be able to transfer up to £1,260 of their unused personal allowance to their spouse or civil partner to save on taxes, but this only applies if neither partner is a higher-rate taxpayer. It's crucial to review your individual circumstances with an expert before making any decisions.
National Insurance rates frozen until April 2028
Following the fluctuation of National Insurance Contribution (NIC) rates last year, changes to NIC rates are expected to be stable from April 2023.
The NIC primary threshold for employees and the Class 2 Lower Profits Threshold for self-employed individuals will both remain frozen until April 2028.
For employers, they begin paying 13.25% Class 1 Secondary NICs on their employees' wages at £9,100, and this threshold will remain unchanged until April 2028.
Tax tip – Employment Allowance?
It's worth investigating whether your company can claim the Employment Allowance, which can reduce your annual National Insurance bill by up to £5,000.
To be eligible, your business must have had Class 1 National Insurance liabilities below £100,000 in the previous tax year.
However, some exceptions apply, such as if your company has only one employee who is a director and paid above the Class 1 National Insurance secondary threshold.
Reduced Capital Gains Tax annual exempt amount
Starting from April 2023, the majority of individuals will be able to claim a Capital Gains Tax (CGT) exemption of only £6,000, which will further reduce to just £3,000 from April 2024. This means that anyone who sells assets that are subject to CGT will have to consider the extra tax they may need to pay due to the reduction in the allowance.
Tax tip – make use of tax efficient investment options
If you have eligible investments outside of an ISA, you may be required to pay Capital Gains Tax (CGT) on any gains you make beyond the allowance. This is an excellent opportunity to start considering saving for the future in an ISA and transferring some investments to an ISA. Transferring investments to an ISA can be a taxable event for CGT purposes, so it's vital to review your financial situation before making any decisions.
It's critical to assess the necessity for investment advice from a certified financial adviser. We collaborate with reputable financial advisers who can offer independent investment advice and a complete range of financial planning services to meet your individual requirements.
Frozen Inheritance tax thresholds
The inheritance tax (IHT) nil-rate band of £325,000 will be frozen until April 2028. In addition, the residence nil-rate band will also be frozen at £175,000. The residence nil-rate band taper will be frozen at £2 million.
Tax tip – consider an IHT review
The latest figures from HM Revenue and Customs (HMRC) show that Inheritance Tax (IHT) receipts for the period of April 2022 to January 2023 reached £5.9 billion, which is an increase of £0.9 billion compared to the same period in the previous year.
The freezing of the nil-rate band and the rise in property prices have led to a higher amount of IHT being paid to HMRC. To minimize exposure to tax, there are steps that individuals can take if their estates are expected to become liable to pay IHT. Seeking specialist advice sooner rather than later is crucial in reducing IHT liability.
Business Taxation changes
Corporation tax rate increase
Starting from April 2023, UK businesses will face the most significant tax increase resulting from the rise in corporation tax.
The new rates will be as follows:
The primary corporation tax rate will increase to 25% on profits over £250,000.
A new 'small profits rate' of corporation tax of 19% will apply to businesses with profits of £50,000 or less.
Companies that make profits between £50,000 and £250,000 will be eligible for marginal relief. This means profits in the margin between the upper and lower limits will pay an effective tax rate of 26.5%.
Additionally, the upper and lower tax limits will reduce in proportion to the number of associated companies for tax purposes, where one company controls the other or both are under common control.
Tax tips to mitigate the corporation tax rise
Company owners should take action to ensure they are as tax efficient as they can be and consider the following:
Corporate structure
Businesses with group structures or common control issues should explore the associated company issue to determine if restructuring can help save on tax.
Research and development tax credits
Companies that have developed new or improved products or processes may be eligible for valuable tax relief. Reforms to the R&D scheme are coming into effect in April 2023, making it essential to review potential claims to unlock valuable relief.
Use of losses
Instead of carrying back trading losses to the previous year and getting a tax refund at 19%, it may be more beneficial to carry the loss forward and obtain a tax refund as high as 26.5%. Companies should weigh the cash flow advantage of a refund at 19% against the potential to get a higher refund later.
Bad debts
To avoid paying taxes on income that will never be received, businesses should review their debtors and properly handle any bad debts.
Stock
Businesses that carry a large amount of stock should make provisions against any slow-moving or damaged stock.
Employing family members
Hiring spouses and family members could be suitable for some businesses, but wages must be justifiable and at a commercial rate.
VAT
The VAT registration and deregistration thresholds will remain frozen at £85,000 and £83,000, respectively, until April 2024.
Switch VAT schemes
Switching to a different VAT scheme could help reduce administrative burden or defer the time when VAT becomes payable.
Get your business ready for tax changes
If you need any help or advice with the financial aspects of running your business, please get in touch to see how we can help.
