Beyond the headlines - how do the tax hikes impact you?
The dust has not yet quite settled since the recent Autumn Statement, which announced higher tax bills for UK taxpayers. As a business owner, whether self employed or director, you will be wondering how to navigate through the next few years with a higher tax burden whilst retaining your business growth ambitions. We review what is changing and give some ideas on how to work tax efficiently through this difficult economic period.
Dividend Tax Changes
Reduction of the dividend tax free allowance over the next two successive tax years:
* £1,000 from April 2023
* £500 from April 2024
The dividend tax rate from April 2023 will remain at the higher rate of 8.75% at the basic rate, and 33.75% at higher rate, and 39.95% at the additional rate.
Beyond the headlines:
Owner managed businesses, in other words, limited companies with one to three directors, will see a modest difference to their cash flow as a result of the reduction in the dividend tax free allowance, as it is usual to withdraw a salary to fully utilise your personal allowance and remaining profit via dividends up to the basic rate tax band of around £50,000 per tax year (slightly lower in Scotland)
However, if you take profits above £50,000 and move into the higher or additional dividend and income tax rate tax band, you will see a marked difference in your personal tax liability, on the assumption that you withdraw all your profits each year via salary/dividends
Tax Planning Opportunities:
⭐ If you do not need to extract above the personal basic rate tax band each tax year, you can keep your personal tax liabilities at their lowest and retain profits in the business as a buffer for future economic uncertainty
⭐If you do need to extract profit above the basic rate band, it is worth doing so in tax year 2023/2024 versus the successive tax year, 2024/25, otherwise you will pay more tax
Freezing of Tax-free allowances
More basic rate band taxpayers will pay more tax from April 2024 as the move into the higher or 40% tax rate tax band.
If the personal allowance increases inline with inflation, the entry level would have been £51,740 from April 2023 and £57,050 from April 2024. Instead it is frozen at £50,270 until April 2028.
Beyond the headlines:
The entry point of paying 40% tax is £7,000 lower than if tax free allowances were allowed to increase in line with inflation
Landlords in particular are impacted, as they do not pay National Insurance Contributions (NICs), where we have seen a reversal of the increase, but now an increase to income tax liabilities
If you have a family and receive child benefit, the entry point of paying the High Income Child Benefit Charge should be £63,000 versus the current £50,000, if the threshold had been increased inline with inflation
Is it time to be a limited company?
From April 2023, the sweet spot for saving on your tax bills moving to a limited company structure has increased to a profit level of around £55,000 (not Scotland, where it will be lower)
Beyond the headlines:
Moving from self employed to a limited company structure is a consideration if you want to pay less tax as your profit grows, but of course there are other reasons why you may want to become a limited company, including separation of personal and business finances from a financial risk perspective as well as maybe appearing as a credible and established business out there in the world
Due to wholesale changes in personal and business taxes and tax free allowances, the sweet spot for going limited is around £55,000 up, where you will be paying less tax than a self employed person and covering additional accountancy costs, generally
Tax Planning Opportunities:
⭐ You do not need to wait till the end of a tax year to incorporate, so if you see your profit increase over the tax year you can move to limited company and a lower tax environment before your profit increases further
⭐Limited company structure affords you more time to pay tax bills versus being self employed, for example you have 9 months after your 12 month financial year-end to pay your corporation tax liabilities, and if you take income from the business, you do not need to pay tax immediately, you record this on your personal tax return as usual and pay by the usual 31 January deadline
“Remember, tax planning is not a one size fits all approach.
Please get in touch for tailored tax advice and a complimentary consultation.”
