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15th March 2023
No changes were announced to the planned personal tax rates which comes as welcome relief after there being three mid-tax year announcements and changes during 2022. Now that the dust has settled and hopefully we have some certainty on the personal tax rates at last, we set out here the prevailing personal tax rates for the 2023/24 tax year.
While the tax bands remain frozen, effectively meaning inflation is increasing the tax payable, employees will see a slight tax reduction in 2023/24 due to the National Insurance (NI) rates returning for the full year to their pre-2022 rates. Additionally, the point at which National Insurance becomes payable is now aligned with the Personal Allowance (£12,570) for the first time since the 2007/2008 tax year!
However, to complicate matters, Employers National Insurance is not aligned and starts from earnings of £9,100 per employee.
Sole traders and partners of partnerships will be able to earn up to £12,570 with no NI charge. 9% is then charged on earnings between this and £50,270, with 2% charged on profits in excess of this.
Dividend tax rates remain at their highest ever. Not only a frustration that this is the only bit of the Health and Social Care Levy that didn’t get repealed, but added to the increase in Corporation Tax rates this leaves a bitter taste for those who run small limited companies. For a comparison of the difference in tax savings between a Limited Company and Self Employed / LLP Structure see the relevant section further below in this article.
We have a full tax table sheet available to download here but for completeness, we have detailed the headline tax rates below:
* Taxable income over £100,000 will result in the loss of £1 of personal allowance for every £2 over this threshold. By £125,140 of taxable income no personal will remain allowable.
This ultimately means that the most expensive tax band is between £100,000 and £125,140 of taxable earnings. The effective tax rate at this tax band is an horrendous 60% (50.6% where the income in this band is dividend income).
The planned increase in corporation tax is going ahead. While the official calculation is complicated, we have a short cut for working this out:
Where profits are below £250,000 for the Financial Year*:
E.g., profits of £100,000 would result in tax of £22,750 (£50,000 x 19% + £50,000 x 26.5%). This means the overall tax rate paid in this example is 22.75% (calculated as £22,750 / £100,000)
Where profits exceed £250,000 for the Financial Year*:
*Associated Company Rules below
The Corporation Tax bandings of £50,000 and £250,000 are subject to the Associated Company Rules. This means that if you, or any other controlling shareholder of the business, can be deemed to have direct or indirect control of more than one limited company, those companies become associated for Corporation Tax purposes and the values in the bandings have to be apportioned between them.
These rules are intended to prevent a business from splintering into lots of little businesses to try and secure lower tax rates, however it can impact business owners who have various companies that do, on the face of it, have totally separate trades.
For example:
You are a 75% shareholder in Company A and a 100% shareholder of Company B. This causes both companies to be associated and therefore the Corporation Tax bandings are divided by two. The £250,000 full rate banding is therefore £125,000 and the £50,000 lower band is also divided by two, becoming £25,000.
If Company A had £100,000 taxable profit then the tax payable would now be: £24,625 (£25,000 x 19% + £75,000 x 26.5%), an increase of £1,875 compared to the example without an associated company. In this associated company example the effective tax rate for this company would be 24.6%.
Something to be careful of is that control of companies can be indirect. If you and your spouse or a relative own 51% of a business between you then that will be deemed control for the associated company rules. Holding companies and dormant companies are excluded from the associated company numbers as well so must be considered correctly.
It is important that when we complete company accounts you let us know of any other companies you are involved with as this could have a major impact on the calculation of corporation taxes.
This is a new capital allowance relief, designed to replace the “Super Deduction” that ends on the 31 March 2023. This relief applies only to limited companies and allows you to deduct the full 100% of costs incurred on assets subject to capital allowances, such as plant and machinery, in the year of acquisition.
In reality this allowance will only be useful to businesses that have already utilised the full £1,000,000 “Annual Investment Allowance” in a financial year. Most small businesses will therefore not see any difference from current rules that allow up £1,000,000 of capital expenditure to be offset against Corporation Tax (or income tax for unincorporated businesses) in the year the cost is incurred.
It is important to note that both Annual Investment Allowance and the Fully Expensing schemes do not apply to company cars.
Which is better? A limited company, an LLP or a sole trade business? This has been a common question for accountants. However, in recent years the answer has not been a simple one. Now that we know the income tax and corporation tax bands for the next tax year we can provide some worked examples to show which structure might suit business owners better. The answers are now more nuanced and the tax difference not as drastic in some cases.
When choosing a business structure it is important to consider more than just tax. A sole trade or unincorporated partnership has lower administration costs and offer a more confidential reporting environment (you don’t have to publish figures publicly, unlike a limited company) but they do have significantly higher risks.
Sole trades and Partnerships have no legal distinction between the business and the owner. This means that any liabilities of the business are yours personally and could put your private assets and own home at risk if the business were to fail or face legal issues. In general, we would also advise that a business that has long term employees or has more than a handful of employees should be structured as a limited company for personal financial protection purposes. An LLP can often provide a best of both options for some businesses.
For now though let’s look at the tax differences. On a very rough calculation if you have a business with one owner generating £100,000 and they draw all profit after tax from the business, then a Limited Company structure works out to be LESS tax efficient by £1,486 compared to trading as a sole trader, partnership or LLP.
This assumes that all profits are drawn, there are no associated limited companies, customers pay at the point of sale and no stock is held.
Considering that a Limited Company tends to cost about £2,000-£3,000 more in administrative costs per year than a sole trade business it suggests that the tax system favours sole trades, partnerships and LLPs once profits exceed £84,020 of profit and where all this profit is extracted.
Where a limited company comes into its own though is where profits exceed the drawings requirements. The above example would have resulted in drawings from the company of around £79,660. If we take an example where the business profits are £150,000 but the amount drawn in the year remains at £79,660 then the Limited Company starts to pull away in tax savings. Now the company is £12,500 more tax efficient than a sole trade business or partnership.
How does this happen? An unincorporated business is taxed on profits at the individual recipient’s highest rate of tax whether you have drawn the money or not. A big difference arises if you have a business where your customers owe you a significant amount of money at the year end or you have invested a lot of the profit in stock that is yet to be sold by the year end. In this case a limited company might pay 26.5% on these profits that are tied up in money owed to you, whereas via a sole trade business you personally could pay 42% or 47% on this profit for which you don’t have the cash. This tax rate is Higher Rate personal tax plus the upper rate of NI (40% + 2%) or Additional Rate tax plus NI (45% +2%).
Tax planning on the most appropriate business structure is very much dependent on a number of factors:
While the above gives an outline of how we might approach working out what structure works best for you, it is important to discuss your specific circumstances with one of our senior team.
The most generous part of the 2023 budget was the relaxing of some of the pension contribution restrictions. The aim being that by allowing high paid workers to contribute more to their pensions without tax penalties this might encourage more of these people, who are usually over 50, to continue in the workforce.
Aside from the employment intentions though, the relaxation of the rules provides further tax planning and wealth planning options for small business owners. Pensions are particularly effective for owners of limited companies for financing ‘life after the business’ or even funding the purchase of commercial property for the business (using SIPPs), where such opportunities arise.
It has been a while since we have had a major update to the pension rules and with the £40,000 annual allowance for pension contributions being increased to £60,000 from April 2023, this addresses that with inflation the old allowance was actually getting smaller and smaller in real terms.
From 6 April 2023 an individual can contribute up to £60,000 per year to a pension without tax consequence. If you operate a limited company then it would usually be most beneficial to pay this as an employer contribution direct from the company to the pension fund. While this doesn’t then benefit from a tax rebate being paid to the pension, it does save the corporation tax for the company.
There is also the ability to use unused allowances from the three previous tax years (provided you had a pension open in each year). This means that from April 2023 the maximum single contribution that could be made is £180,000 (£40,000 x3 + £60,000 for 2023). If making this as an employer’s contribution from a limited company with an April 2024 year end this could save around £45,000 in corporation tax.
Where a contribution is not made by your company as an employer contribution, it is instead paid by you personally, you are required to have sufficient “net relevant earnings” in order to avoid a tax charge. This essentially means personal contributions to your pension are capped at the lower of your employment/self-employed income and the Annual Pension Allowance. Rental income and dividends do not count towards this. If you have low or no employment income or self-employed profits then the rules allow you to contribute £3,600. Exceeding your net relevant earnings will result in a tax charge payable on your personal tax return.
Imagine you have a salary of £10,000 per year, rental income of £5,000 and dividends of £50,000 and you put £30,000 into your pension as a personal contribution. Because your net relevant earnings are only £10,000 (being only your salaried earnings) there would be a tax charge payable. In this case the tax would be 20% of the excess, therefore a tax charge of £5,000. This is essentially to compensate that the pension fund received a 20% tax rebate on the £20,000 excess that was not entitled to tax relief.
For high earners, with taxable income of over £200,000 the annual amount that can be put into a pension might also be restricted. If you calculate your income and deduct gross personal pension contributions and this is below £200,000, you don’t have to worry about any restrictions. Otherwise if it exceeds this level, a calculation for “assessable income” has to be made.
In crude terms, this requires you to calculate all income subject to tax, add employer pension contributions made on your behalf and where this total exceeds £260,000, the £60,000 annual allowance will be tapered down to a minimum £10,000 (it is reduced by £1 for every £2 of income over the £260,000 threshold).
If you think you are at risk of this restriction then please talk to us or your IFA for a detailed assessment to be carried out.
Up to the end of the 2022/23 tax year the maximum an individual could have invested in a pension was £1,073,100. From April 2023 this cap will be removed which means many people who had “maxed out” their pensions can now contribute again.
Until April 2023 there was a restriction that if you were in “draw down” of a pension you could no longer put the full annual allowance into your pension but were restricted to putting in only £4,000 per year.
This has now been increased to £10,000, meaning if you draw down on a pension but still earn enough to put money into another pension you can do so to maximise wealth planning in some cases.
There are now two main options for salary and dividends structures for owners of limited companies.
For most businesses our simple approach will work best. This is best suited for businesses with one director / employee or where you have employees that already fully utilise the Employers Allowance. In these cases our standard recommendation to maximise your basic rate band of income would be as follows:
This would result in tax payable of £3,124 per year. This allows a £14 per year buffer for other income to remain within the basic rate band of tax.
However, it’s important to note that with the rate of inflation and frozen tax bandings, we would expect most business owners will need to draw above this amount each month. Drawing more than this will result in tax being paid at the higher rate tax band. For every £100 paid as dividends in excess of the amount above you should put aside £33.75 of tax.
If your total income exceeds £100,000 then more than this should be put aside. We recommend seeking a personal tax forecast from your client manager if you think you will draw dividends to this level.
For some businesses where you want to maximise utilisation of the employer’s allowance or company tax savings then an uprated monthly amount you could process is:
This will result in the company paying £480 in Employer’s National Insurance. While this option gives better overall tax savings, it saves company tax at the expense of paying extra personal tax and therefore does not maximise your net earnings. As the difference in tax is only marginal and the net income position is not higher than our standard option, we reserve these rates for use on a case by case basis.
The director’s taxes environment is still not a simple one!
We will be running an event on Thursday 23rd March 2023 where we will be going into more detail surrounding the budget announcements and tax rises and how you can alleviate the impacts. There are only a couple of spaces left, so register a space now if you’d like to be there!
As we feel it’s our duty to help support owner managers through these challenges and help them spot opportunities to pivot and grow, we launched our Challenging Times Support Hub last year. If you have missed any emails, you can review the checklist here. We will continue to share out advice every fortnight.
We will soon be launching a special ‘Staffing’ series to help tackle the staffing crisis many business owners are facing right now. Keep a look out for the email series on this soon!
BA (Hons) FCA
Partner & Principal Adviser
01474 853856
josh.curties@a4g-llp.co.uk
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