Table of Contents
Content accurate as of 13.03.2023
Following the Chancellor’s Spring Statement, the big tax change increasing Corporation Tax was already expected but hoped to be repealed. Unfortunately, it was not and will come into effect from 1st April 2023.
What are the tax changes?
From 6 April 2023 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, but this will be reduced to £1,000 from the previous limit 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. There may be an impact on these rates if you control more than one company, as then the rates are split. See further information below
- Income Tax – no change to rates. The Chancellor has committed to reducing 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 has been uplifted for all to £12,570, effectively aligning the point at which an individual starts to pay NICs with the £12,570 income tax personal allowance.
- 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’ NICs start to apply, namely £9,100 for most employees in the tax year to 5 April 2024.
- Capital Gains Tax – no changes to rates. However, the annual allowance has been reduced from £12,300 to £6,000, and it is proposed it is reduced by 50% again next year.
- 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
Tax Bands and Allowances
Summary table of key income tax rates and allowances for the tax year to 5 April 2024 (2023/24)
|Band||Taxable Income||Tax rate in 2023/24|
|Other income||Savings income||Dividend income|
|Personal allowance||Up to £12,570||0%||0%||0%|
|Basic rate||£12,571 – £50,270||20%||20%||8.75%|
|Higher rate||£50,271 – £125,140||40%||40%||33.75%|
|Additional rate||Over £125,140||45%||45%||39.35%|
*Rates do vary in Scotland
Savings income continues to benefit from a personal savings allowance of £1,000 for basic rate taxpayers and £500 for higher rate taxpayers. Dividend income attracts a £1,000 dividend allowance in 2023/24, down from the £2,000 allowance seen in previous years. These allowances are in addition to the personal allowance and attract a 0% rate of income tax.
Other Significant Taxation Announcements
Here is the rundown 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 by 31 March/5 April. It’s been deferred from April 2023 to April 2024 and with some additional spreading options. More details are below.
- The 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.
- The annual Pension limit has increased from £40,000 per annum to £60,000 per annum, and the overall lifetime cap abolished. Further details are below.
Company Directors – Setting the best level for your salary for 23/24
We have set out below the optimum salaries and tax bands if you are a company director paid with a salary and then dividends.
A: If you run your own payroll
As employees’ NIC has been aligned with the tax you will need to set your salary at £12,570 gross per annum. There will be no tax or NI deduction from this, but there will be employers’ NIC due towards the end of the tax year totalling £478.86. However, it’s better to pay this tax at 13.8% rather than corporation tax at 19/25% and so a small tax saving here.
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 in 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 monthly 2023/24 take-home salary at £1,047.50:
We will process your 2023/24 payroll at the new levels indicated above. When you receive the April 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.
Your salary will be £1,047.50 per month; you can then take £1,000 of dividends per annum tax-free. There is then tax payable at 8.75% on the next £36,700 of dividends per annum. 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 as you start to lose your personal allowance at this level.
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, you should inform us as we may then claim the employment allowance to mitigate the employers’ NIC.
• If your total income is between £100-£125k, you should consider making additional pension contributions to mitigate this, as taxation in this range is around 60% depending on your type of income.
From 1 April 2023, the main rate of corporation tax increases to 25%, but companies with sufficiently small profits will continue to pay only 19%. Where a company has a number of ‘associated companies’, however, the relevant thresholds for applying the main rate are reduced, effectively splitting the potential benefit between them for small businesses.
This also impacts large companies as this will also be taken into account in determining when a company needs to pay corporation tax in instalments.
HMRC guidance at CTM03900 sets out when the small profits rate of 19 percent applies and how to undertake the calculation is available at a new online marginal relief calculator to assist companies with this.
A company is an associated company of another company if one has control of the other or both are under the control of the same person or persons. This includes non-UK resident companies but excludes dormant companies. It may be worthwhile identifying associated companies and deciding if they are necessary, and if removed, might this create a small tax advantage?
Unincorporated businesses and their accounting year-ends
Unincorporated businesses that prepare annual accounts to a date other than 31 March or 5 April will soon need to adopt a new process for how the profits or losses arising in those accounts are reported to HMRC. At present, ‘basis period’ rules apply that broadly allow annual accounts that end in a tax year to act as the basis of profits or losses arising in that tax year.
This new system starts with transitional rules in the tax year ending on 5 April 2024 (2023/24). Going forwards, actual profits or losses arising in a tax year must be reported to HMRC, but this does not necessarily require a change in accounting year-end.
There was good news in the Budget for those saving in a personal pension. The current pension lifetime allowance (LTA) charge is being abolished from 6 April 2023. The LTA has caused some high earners, particularly doctors, to retire early as tax charges apply on the crystallisation of pension funds if the LTA (currently £1,073,100) is exceeded.
Individuals may be able to receive 25% of their pension savings as a tax-free lump sum when they become entitled to their pension benefits. This is currently capped at 25% of the LTA and going forwards, for most individuals, will remain capped at £268,275.
Another pension limit increased by the Chancellor in the Budget was the pension Annual Allowance (AA) which increases from £40,000 to £60,000 from 6 April 2023. The AA applies to the combined pension input by the individual and, in the case of employees, their employer. Pension contributions in excess of the AA result in a tax charge on the individual, although they may take advantage of unused AA amounts from the 3 previous tax years.
For those with high incomes, the AA is tapered. From 6 April 2023, where a taxpayer’s adjusted income exceeds £260,000 (increasing from £240,000), the AA is tapered by £1 for every £2 in excess of £260,000, down to a minimum of £10,000 (increasing from £4,000).
The Money Purchase Annual Allowance (MPAA) replaces the AA when an individual starts to flexibly access a defined contribution pension scheme. The MPAA will increase from £4,000 to £10,000 on 6 April 2023.
Note that an individual’s pension contributions can be very tax efficient depending on their level of income. If you are considering making a further personal pension payment this year, you may wish to do this and should ensure cleared funds are passed to the pension provider before 5th April 2023, 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 with the rules.
If you run your own company, your company can make a contribution. The taxation rules for pensions are complex as there have been numerous changes in recent years so please talk to us about your pension contribution strategy.
Benefits and State Pension
As confirmed in Autumn Statement 2022, the government will also increase benefits, including the State Pension, paid to recipients in the tax year to 5 April 2024 by 10.1%.
This increase in the State Pension means that most pensioners will receive £10,600 in 2023/24, where they have 35 qualifying years.
You are being urged to check your contribution record on your Government Gateway account and consider making Class 3 voluntary National Insurance (NI) contributions in respect of missing qualifying years. Normally it is only possible to make voluntary NI contributions for the past 6 tax years, but until 31 July 2023, it is possible to go back as far as 6 April 2006 and pay additional contributions at the 2022/23 Class 3 rate of £15.85 per week.
This is a pension investment decision, and your IFA may need to be consulted to ensure this ties into your overall investment plan.
In-year Class 3 contributions for 2023/24 will increase to £17.45 per week.
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.
*Content accurate as of 13.03.2023
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.