The 2023 Spring budget brought about a couple of surprises, but also served to reaffirm a few key changes taking place in April 2023. Below are key highlights.
The big surprise was around changes to pension limits. From April 2023:
- The Annual Allowance increases from £40,000 to £60,000
- The income level for the Tapered Annual Allowance increases from £240,000 to £260,000
- The Minimum Tapered Allowance and the Money Purchase Annual Allowance both increase from £4,000 to £10,000
- The Lifetime Allowance has been abolished
The super-deduction has duly finished as at the 31st of March 2023 and is now replaced with something called “Full Expensing”. Certain qualifying expenditure will benefit from 100% first year allowances for certain qualifying expenditure, particularly new (not used) plant & machinery. It will be effective from 1 April 2023 to the 31st of March 2026, at the moment.
Other certain assets will benefit from 50% first year allowances for other plant and machinery will also become available. And, like the super deduction, these allowances are only available for limited companies.
The Annual Investment Allowance remains at £1,000,000.
Corporation Tax rate rise
The proposed corporation tax rate rise will increase, with companies paying 25% on profits over £250,000. Companies earning £50,000 or less will continue to pay a small profits threshold of 19%. Between £50,000 and £250,000, a marginal rate of 26.5% will be in place which will bring up the effective total rate up to 25%.
Associated company rules make a return, which mean the limits at which you reach those thresholds are divided by the number of companies you are ‘associated’ with. For example, if you have control of two companies, your small profits threshold is £25,000 per company.
Research & Development (R&D) relief
The SME deduction rate is duly being cut from 130% to 86%, with the credit rate decreasing from 14.5% to 10% for loss-making, R&D intensive SMEs. The R&D Expenditure Credit (RDEC) will increase from 13% to 20%. Qualifying expenditure has been expanded to now consider cloud computing. R&D intensive companies are those whose R&D expenditure is equal to 40% of their total expenditure.
There are thoughts to merge the SME and RDEC schemes in the future and the RDEC remains competitive amongst the G7.
Personal Tax allowances
The main change is the reduction of the additional rate, which now kicks in from £125,140. This lower figure, whilst appearing unusually specific, is also the point at which an individual’s personal allowance will have been reduced to nil (for every £2 earned over £100,000, you lose £1 of your £12,570 personal allowance; £25,140 is double the personal allowance figure).
Dividend Tax allowances
The 0% tax allowances for dividends are being halved as planned; first, to £1,000 for the 23/24 tax year, then £500 for the 24/25 tax year again.
Dividend tax rates are taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
Capital Gains Tax allowances
The Capital Gains tax rates are reducing from £12,300 to £6,000 during the 22/23 tax year and then £3,000 from the 23/24 tax year.
National Minimum Wage
The Government announced increases to National Minimum Wage and National Living Wage.
- 23 or over – £10.42 (National Living Wage)
- 21-22 – £10.18
- 18-20 – £7.49
- Under 18 / Apprentice – £5.28
The 30 hours a week of free childcare for eligible working parents is now being expanded to cover children from 9 months to 3 years. Parents of children from 3-4 years will continue to benefit.
It will be released in phases, with working parents of 2-year olds being able to access 15 hours a week from April 2024.
From September 2024, working parents of children from 9 months to 3 years can access 15 hours a week.
Finally, from September 2025, all working parents of children from 9 months to 3 years will be able to access 30 hours a week.
This was a quieter budget as a lot of the measures were put in place one or two years ago and are simply going ahead from April. It personally makes for tough reading.
The improvement of the 30 hours free childcare will be welcome for working parents and this feels like the biggest positive in what is otherwise going to be a tricky budget to negotiate.
Whilst the improvement to pensions allowances do present some improved tax planning opportunities, the scope of those they will benefit will be naturally quite narrow.
Small business owners will be feeling the pinch, with not only corporation tax rate rises but as well reduced dividend allowances will mean the benefits of owning a Limited Company will not be as significant as they may have been a few years ago. I am asked regularly whether incorporating is worthwhile. My answer is still “it depends”, but it’s clear to see that the tax benefits are being eroded. It does feel more likely now though that incorporating solely for tax benefits alone is less worthwhile.
Those with multiple companies as well need to consider whether they be hit with how small profit thresholds are spread across any companies you are ‘associated’ with.
A planning opportunity remains for those who have earned significant gains before the 31st of March, as to whether shortening their year end may benefit them. There are very few scenarios where this might be the case.
Minimum wage increases are a double-edged sword. With inflation rife, it feels the right thing to do, however it will be small business owners who will feel the pinch and for them, it represents another inflationary increase to adjust to.
Bigger businesses though may benefit, with the RDEC rate increasing along with the introduction of “Full Expensing”. I was hoping the super-deduction would be replaced with something similarly beneficial, but sadly not.
The unspoken impact of fiscal drag remains in place, with the VAT thresholds and personal allowance not being lifted, meaning more will be caught into these brackets of tax as their salaries and revenue rises.
I expected the budget to be pretty tough as the UK recovers from a few shockwaves of late and as ever, the changing landscape means it’s a good time to review your plans.