As 1 April arrived, it was no April fool that some smaller limited company owners would see a 39% increase in their Corporation Tax bill on profits over £50,000.
We discuss some of the main changes affecting limited companies from 1 April and individuals from 6 April.
Income tax
The income tax basic rate and higher rate thresholds are frozen until 2028 at £12,570 and £50,270 respectively. This will pull more taxpayers into higher rate tax, of 40%, a concept known as ‘fiscal drag’, with over a million individuals expected to the pay the 40% higher rate for the first time.
The additional rate, of 45%, threshold is reduced from £150,000 to £125,140 from 6 April. This is also the same level of income when individuals will lose all of their personal allowance. Individuals lose £1 of their personal allowance for every £2 of income above £100,000.
Dividend tax
The dividend allowance was reduced to £1,000 from 6 April 2023. It will reduce further to £500 from 6 April 2024. This is a significant fall from the £2,000 threshold in the tax year to 5 April 2023, and the £5,000 allowance when the dividend tax was first introduced.
Many individuals, who have not previously prepared a Tax Return, may soon have to and therefore declare their dividend income for the first time. This change may affect retired individuals and those with modest share portfolios that pay annual dividends.
Capital gains tax
The capital gains tax annual exemption fell from £12,300 to £6,000 for individuals. The exemption is due to reduce further in 2024-25, to £3,000 for individuals.
The rates of capital gains tax remain unchanged at 10% for basic rate and 20% for higher rate tax payer, except on residential property, other than on your primary residences, where the rates are 18% and 28% respectively depending on your income.
The capital gains tax reporting proceed limit is now fixed at £50,000, rather than £49,200 which was 4 times the £12,300 annual exemption. Therefore, even if you have not made a capital gain over the annual exception of £6,000, and £3,000 from 6 April 2024, you will still need to report the gain to HMRC.
Corporation Tax
The main rate of Corporation Tax has increased, from 19% to 25%, for most companies. However, all companies can now ‘fully expense’ their capital [fixed asset] purchases for the next three accounting years.
However, companies with profits below £50,000 will not be affected due to the introduction a small profits’ rate for these companies. A marginal rate of 26.5% will also be introduced for profits between £50,000 and £250,000. The result is that all profits of £250,000 and over will all be taxed at the full 25% rate, and not just the excess over £250,000.
Micro businesses can breathe a sigh of relief with the small companies’ rate of 19% reducing the impact of the Corporation Tax rise on profits up to £50,000.
What can I do to reduce my Corporation Tax bill if my profits are over £50,000?
Should a company make profits of £60,000, it would pay 19% on the first £50,000 and 26.5% on the next £10,000. This is a 39% increase. Where possible, it would be sensible to engineer a profit reduction.
Paying a £10,000 employer pension contribution, would only cost £7,350, after the £2,650 Corporation Tax saving.
Consider paying, or increasing, a rental charge for use of home as office.
Charge your company for personal use of assets that you own and make available to the company.
It may also be worth charging your company to provide your services through other means e.g. making a self employment charge. I’m sure all micro limited companies do not pay anything like a market value for the services that you provided to your company, as a director or employee. Why not therefore make a separate self employment charge for your services. Even a modest charge, of say £12,000 pa, would save Corporation Tax of £3,180. You may have to pay 20% income tax on the income, but that is still a 6.5%, £780, tax savings. In fact, as you would most probably have taken the £12,000 out by way of dividend, you’ll also save an extra £840 in dividend tax.
If a company is expecting a significant reduction in profits in the coming year, and especially if it is also ceasing to trade after 31 March 2023, or soon thereafter, it may be beneficial to change their year end (accounting reference date). This is because accounting annual profits are time apportioned, up to and after 31 March 2023. This may mean profits generated up to 31 March 2023 being taxed at the average rate for their accounting year, partly at a rate between 19% and 26.5%.
A company with profits over £250,000, with a 30 September 2023 year-end, would pay an average rate of Corporation Tax of 22% (i.e. 50% of 19% + 50% of 25%). If the profits are generated mainly before 31 March 2023 then creating a short set of annual Financial Statements, for 6 months to 31 March 2023, would ensure all the profit generated up to 31 March is only taxed at 19%, with the small amount after 31 March 2023 being taxed at 25%.
Capital allowances
The 130% super deduction allowance ceased on 31 March 2023.
However, companies investing in qualifying purchases on new plant and machinery in the three years from 1 April 2023 can instead claim one of two temporary allowances:
· a 100% first-year allowance [full expensing] for main rate expenditure; or
· a 50% first-year allowance for special rate expenditure.
The annual investment allowance is now set at £1m on a ‘permanent basis’ from 1 April 2023.
Pension tax
The Lifetime Allowance is the maximum amount of pension savings that an individual can accumulate and receive tax relief on pension contributions during their lifetime, without incurring a tax charge when they draw the pension fund.
Up to 5 April 2023, where the value of the pension savings was higher than the Lifetime Allowance, there was be a tax charge of 55% on the excess, if taken as a lump sum, or 25% of the excess, where the entire benefit is taken as a pension.
The Annual Allowance is the maximum amount of money that an individual, employer and third party can pay into a pension scheme each year without incurring a tax charge. For occupational pension schemes, actually it is not just the amount paid into the pension scheme that count, but also the increase in benefits in that year that arise. Occupational ‘final salary’ pension schemes can provide a large uplift in annual benefits to an employee eh where they receive a promotion / large increase in pay. It is not just the extra pension receivable this year, and going forward, but for past service.
The annual allowance was increased from £40,000 to £60,000, apparently to incentivise NHS doctors to remain in work longer. As a result of the pension change, it is said that around 80% of NHS doctors will no longer suffer the pension tax charge on their NHS pension schemes.
The adjusted income threshold for the tapered annual allowance will be increased from £240,000 to £260,000.
The Money Purchase Annual Allowance is a restriction that applies once an individual has flexibly accessed their pension fund and once a ‘trigger event’ has occurred. The allowance is the amount that an individual can contribute into their pension scheme without incurring an Annual Allowance charge.
The money purchase annual allowance limit was also increased from the current £4,000 to £10,000. This will allow individuals, who have made income withdrawals from their personal pensions, e.g. from a small pension pot or possible previous early retirement, to no longer be severally restricted from paying modest future pension contributions into their pension schemes. It will allow some individuals to continue, or restart, making modest personal pension contributions and/or allow their employers to make pension contributions on their behalf without a penalty charge.
The maximum pension commencement lump sum (‘the 25% of tax-free pension lump sum’) will be retained at its current level of £268,275, i.e. 25% of old Lifetime Allowance of £1,073,100, and will be frozen thereafter. Up to 5 April 2023, lump sums paid out above the Lifetime Allowance were taxed on individuals at 55%. This will now change to individual’s instead being taxed at their marginal rate of income tax.
There have been no changes on carrying forward any unused Annual Allowance from the previous three tax years, so long as they were members of a registered pension scheme in the earlier year(s).