Following the Chancellor’s Spring Statement last week, the two big tax changes funding Covid recovery were already known, with the introduction of the Health and Social Care Levy and the Corporation Tax changes coming in from April 2023.
What are the tax changes?
- Health and Social Care Levy – a 1.25% rise in Employers’ and Employees’ National Insurance (NI), Class 4 Self Employed NI and Dividend Tax (DT) from April 2023. For the first 12 months this is an increase to existing NI/DT rates.
From 6 April 2022 the tax rates that will apply to dividends will be 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate), dividends will continue to be taxed as the top slice of an individual’s income. All individual taxpayers will continue to be entitled to the tax-free dividend allowance of £2,000 per year.
- Corporation Tax – the main rate rises to 25% from 19% from April 2023 – so a 6% increase. Businesses with profits below £50k will still pay 19% and there will be a taper for businesses with profits between £50k and £250k.
- Income Tax – no change to rates. The Chancellor has committed to reduce the basic rate of income tax from 20% to 19%, but not until 6 April 2024.
- National Insurance Contributions (NICs)- The annual level at which employees and the self-employed start to pay NICs was due to increase from £9,568 to £9,880 from 6 April 2022. This increase will go ahead but be further uplifted to £12,570 from 6 July 2022, effectively aligning the point at which an individual starts to pay NICs with the £12,570 income tax personal allowance.
However, the implementation is a little convoluted – for employees the change comes from 6 July 2022 to allow time for payrolls to update, and for the self-employed there is an apportioned threshold for 2022-23 with 3/12ths of the old threshold and 9/12ths of the new one. With the starting NIC threshold for the self-employed and company directors computed on an annual this will set a pro-rata sum of £11,908 for the whole of the tax year to 5 April 2023, before increasing to £12,570 in the tax year to 5 April 2024.
For the self-employed, some individuals will find that they no longer need to pay Class 2 NICs from April 2022. The small profits threshold will be set at £6,725 as planned but the requirement to pay Class 2 NIC will only apply to those with self-employed profits over £11,908.
From 6 April 2023, Class 2 NIC will only be payable by those with profits over £12,570.
- Employers’ NIC – No changes have been made to the annual level at which employers’ NIC start to apply; namely £9,100 for most employees in the tax year to 5 April 2023.
- However, the Employment Allowance, which allows eligible businesses to reduce their employer NIC cost, will increase from £4,000 to £5,000 for the tax year to 5 April 2023.
- Capital Gains Tax – no changes to rates, no major changes to allowances/exemptions. Annual exemption frozen.
- Inheritance Tax – no changes to rates, no major changes to allowances/exemptions. Nil Rate Bands frozen.
- Value Added Tax – no changes to rate or registration/de-registration
No extension has been granted to the leisure and hospitality sector for use of the reduced 12.5% VAT rate on eligible supplies including food, non-alcoholic beverages and hotel and holiday accommodation. The VAT rate applied to these supplies will revert to 20% from 1 April 2022 as planned.
Tax Bands and Allowances
This is the Governments table of Rates and Allowances
Other Significant Taxation Announcements
Here is the run down on other significant announcements which are likely to be of interest to our clients:
- Basis Period Reform – this will affect sole traders and partnerships who don’t prepare their business accounts to 31 March/5 April. It’s been deferred from April 2023 to April 2024 and with some additional spreading options.
- Minimum Pension Age – is rising from 55 to 57 from 2028. This is the age at which benefits can be taken from Private Pensions – don’t confuse it with State Pension Age.
- National Living Wage – goes up from £8.91 to £9.50 for the over 23s from April 2022.
This is a brief review of last week’s announcements, and more detail will inevitably seep out over coming weeks. We have set out below the optimum salaries and tax bands if you are a company director paid with a salary and then dividends.
Company Directors – Setting the best level for your salary for 22/23
A: If you run your own payroll
You will need to set your salary at £11,908 (up from £9,568) gross per annum or £12,570 (same as £12,570 last year) gross per annum depending on your individual circumstances and pay the net salary and taxes as they are calculated. See below for additional guidance.
B: If we process your payroll
We will soon email you the March quarter’s payroll. There WILL be some National Insurance payable to HMRC this quarter. Details of how and what to pay will be with the payroll reports, please check these reports when you receive them. Whilst there is some NI due this is lower than the combination of corporation and dividend taxes and is part of your tax planning. Do not forget to pay this.
To minimise the taxes due, you should set your 2022/23 take home salary at:
- If you currently have a standing order paying £797.34 salary from the company to you each month, then you should increase this to £992.33. Note because the chancellor has split the National Insurance bands there will be a small amount of Employers National Insurance due in March 2023 similar to this year and we will let you know this amount in due course.
- If you have a £1,017.48 net salary this should be increased to £1,040.19
We will process your 2022/23 payroll at the new levels indicated above. When you receive the first quarterly payslips please check that these agree to the payments you are making and if not, let us know of any discrepancies so they can be adjusted.
- If your salary is now £992.33 per month you can then take £2,662 of dividends per annum tax free. There is then tax payable at 8.75% on the next £35,700 of dividends. The dividend tax rate then increases to 33.75%.
- If your salary is £1,040.19 per month you can then take £2,000 dividends per annum tax free. There is then tax payable at 8.75% on the next £35,700 of dividends. The dividend tax rate then increases to 33.75%.
If you have other income this will reduce the banding accordingly:
- The 33.75% band continues until your total income reaches £100k then the % rises again.
Top Tax Director/ Shareholder tips to consider:
- If you have not already, you may want to transfer some shares to your spouse to reduce dividend tax.
- If you are the sole director/employee and take on another employee who is paid at the level where NIC is due, you should increase your salary to £12,570 per annum as this will reduce taxes as you can claim the Employer’s NI allowance.
The Marriage Allowance
The Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner. If they earn more than you, this reduces their tax by up to £252 in the tax year. To benefit as a couple, the lower earner must have an income of £12,570 or less. Also, neither of you can be a higher rate tax payer.
Pension Payments 2022/23
If you are considering making a further personal pension payment, you may wish to do this before 5th April 2022 as it will extend your basic rate tax band and allow additional tax relief. There are various limits and rules surrounding pensions and if you are considering making a large contribution then you need to check you comply.
Contact Treetops for tax planning advice
If you run your own company, your company can make the contribution, which may allow you to make higher additional payments up to £40,000 per annum plus unused relief brought forward.
If you are considering this you should contact your pension advisor and let us know the contribution in due course.
Remember that the tax relief on pension contributions is given in the year that the contributions are actually paid and cleared the bank by 5th April.
This newsletter includes advice that is generic in nature and should not be interpreted as legal advice. Please contact us for specific and confirmed tax planning advice.