Planning effectively for a better tax year end

As the country braces itself for lowest March temperatures since 2010, it is more than just freezing weather that we should be concerned with.  It is also the freezing of various tax bands and allowances from 6 April 2023 that will see the majority of people paying more in tax in the coming year.

In his Budget speech last year, Chancellor Jeremy Hunt announced a number of changes that would result in additional taxes but he achieved this by freezing bands and allowances that would normally increase as a result of inflationary rises.  Essentially, the Chancellor is using fiscal drag to increase revenues rather than increasing tax rates.  This has been exacerbated by the cost of living raises that many employers have applied to their staff’s salaries.

Using Allowances and Bands

With the tax free personal allowances, basic rate and higher rate bands all being frozen at current levels until 2028, it is perhaps now more important than even to ensure that have paid sufficient salary and dividends to utilise your tax free personal allowance (£12,570) and your basic rate band (£12,571 to £50,270).

As many will be aware, the threshold for the abatement of the personal allowance kicks in at £100,000 meaning that those with incomes exceeding £100,000 then will lose their personal allowance and suffer a 60% marginal tax rate.

The Chancellor took the opportunity to reduce the threshold for the 45% tax rate from £150,000 to £125,140 meaning that those with income between £125,140 and £150,000 will pay 45% tax rather than 40% tax from 6 April 2023.  The incentive to keep your income below £100,000 will be greater than ever but in the current year, it may be worthwhile being able to take advantage of this slightly lower rate for the last time.

Business owners should also consider whether it is possible to utilise bands for their spouses and children as this could allow a family income in excess of £100,000 but a lower average tax rate.

Dividend Taxation

We will all be aware that the Government had intended to introduce a new Health and Social Care Levy with effect from 6 April 2023 and as a precursor to this, they temporarily increased National Insurance and Dividend tax rates by 1.25% from 6 April 2022.

The decision to introduce this new levy was reversed back in November and National Insurance rates dropped back to their pre-April 2022 levels but dividends rates did not.  It has also been announced that the dividends rates will retain this additional 1.25% tax from April 2023 onwards.

With Corporation Tax rates raising to 25% for companies with profits in excess of £50,000, is it still more efficient to pay dividends rather than salaries to business owners?  We have calculated that the effective rate of tax – factoring in corporation tax, income tax and National Insurance contributions from 6 April 2023 will be:-

	From 6 April 2023 Salary	Dividends	Up to 6 April 2023 Salary	Dividends
Basic Rate	40.25%	31.56%	40.25%	26.09%
Higher Rate	49.03%	50.31%	49.03%	46.34%
Additional Rate	53.43%	54.51%	53.43%	50.87%

Obviously there are cashflow disadvantages to paying salaries rather than dividends but this is something that does now need to be more carefully considered.  Paying salaries can also have other benefits including the ability to enhance R&D tax credit claims.

It should also be noted that the tax-free dividend allowance of £2,000 will be halved to £1,000 from 6 April 2023 and then halved again to £500 from 6 April 2024.

There are not any significant advantages to accelerating the payment of dividends as it is the corporation tax rate changes that are really driving the effective tax rate change so if your company has already earned the profit and been taxed at 19% on this then paying an extra dividend before 6 April 2023 will not have any impact.

Consider Alternative Profit Extraction Methods

The best way to reduce your liability to tax is proactively manage your income.  This includes:-

• Utilising bands and allowances of family members – please see our blog on Family Investment Companies;
• Taking advantage of tax efficient benefits in kind such as providing electric cars via salary sacrifice or making pension contributions – please see our Employers Update for tips;

Changes to Basis Periods for Partners & The Self Employed 

Then long awaited changes to how partners in partnerships and the self employed are taxed is almost upon us.

This change will impact all partnerships, LLPs and self-employed persons who have an accounting period that ends on any date other than 31 March or 5 April.

It will be prudent for these businesses to consider changing their year ends to align with the tax year to save having to apportion profits every year, which will be an administrative burden and could result in higher professional fees. 

Capital Allowances – Last Chance Saloon

The temporary 130% Super Deduction and 50% Special Allowance for companies will come to an end in just a few weeks.  These are potentially very valuable reliefs for anyone that owns and operates a company and if you are planning any capital expenditure then now may be the time to buy that new laptop, iPad or company van!

Although initially excluded, the Government widen these reliefs to allow landlord companies to benefit as well, which could be important for any Family Investment Companies that have rental properties – particularly furnished holiday lets.

Personal Tax Reliefs

Check that you have utilised your pension allowances plus any brought forward allowances for the year.

Charitable donations do not necessarily need to be made before 5^th April as it is possible to carry-back donations made after 6^th April but before your tax return is filed.  This can be a very useful tool for anyone that is near a tax rate threshold change – in particularly the band between £100,000 and £125,140 of income.

Tax Efficient Investments

Have you topped up your ISAs for 2022/23?

It is also worthwhile considering whether you should make any tax efficient investments into EIS, SEIS or VCT companies.  All of these come with different levels of risk and we would recommend speaking to a Wealth Manager or Independent Financial Adviser about these as part of your investment strategy.

Capital Taxes

You should also consider:-

• Have you used your CGT annual exemption (£12,300)?  This is reducing to £6,000 from 6 April 2023 and then to £3,000 from 6 April 2024 so now may the last opportunity to benefit from a higher allowance for some time!
• If you sell a residential property, please remember that you have to report the gain and pay any tax due within 60 days.
• Have you used your IHT annual allowance (£3,000) plus any allowance brought forward from the previous year?

Voluntary National Insurance Top-Up Payments

The Government has announced that taxpayers have until 31 July 2023 to make voluntary contributions to top-up their National Insurance records for any missed years going back to April 2006.

Anyone who may not have a full National Insurance contributions record before their projected state pension age, especially those over 55 who may not have the chance to accrue this in the future solely through PAYE or self-employment should consider if it makes financial sense to pay to top-up.

You can obtain a state pension projection based on your current and future contributions which could assist you in deciding whether to top up.

From 1 August 2023, the timeframe for making voluntary contributions will revert to the normal six years meaning it will only be possible to plug gaps from 2017/18 tax year onwards.

Don’t get left out in the cold!

Should you have any questions or if you would like to discuss any of the planning options mentioned above then please do not hesitate to contact us.