Budget Review 2023

No new measures for our client base

Already Announced

Corporation Tax Rate

Corporation Tax up to 25% from April 2023 on profits over £250,000.

Small profits rate of 19% for profits under £50,000.

‘Tapering’ between the two bands, which means profits between £50,000 and £250,000 are paid at 26.5%.

This means the benefits of using a Limited Company are reduced, but for most situations the balance has not yet tipped towards a partnership or sole trader position for most clients. It does however make pension contributions a lot more attractive.  See Appendix Two for discussion about strategies for small companies.

Tax Free Dividend Band

Reduces from £2,000 to £1,000 April 2023, and £500 April 2024

For Larger Business Only

100% Capital Allowances Extended

All capital expenditure on Plant and Machinery can be written off for tax in the year of expenditure

Integral features have a 50% write down

This is aimed at boosting capital investment, as there is an immediate write off for tax.  This mainly benefits larger businesses making significant capital investments, and will have impact for only one of our clients, and seems to be about “money for big business”, and costs £9 billion a year.  Or about twice the impact of freezing your personal allowances, albeit with the hope of increased investment.  The OBR however…..seems to think all this will do is displace spending between tax years. 

No new changes

Already announced, but worth reminding you of:

SDLT Threshold

The temporary expansion of the nil rate SDLT band to £250,000 will end in March 2025.

This is quite helpful for those buying smaller properties, or looking to change ownership.  The 3% additional rate will still apply.

60 Day Payment Deadline for CGT 

If you are selling your let property, HMRC need to be notified and CGT paid within 60 days of sale.

No apologies for keep putting this in as we still have a few clients unware.

Corporation Tax Increase

For landlords considering incorporation please see Small Company section for details of the Corporation Tax moving to 25%.

There is little new for our clients

Pension Changes

As ‘leaked’ (or preannounced by no.11) , there are various changes to pensions:

• Increasing the annual limit from £40,000 to £60,000 from 2023/24 [This won’t affect carry back which will be at the old rates]
• Increasing the “drawn pension” limit from £4,000 to £10,000 [If you have already being drawing a pension]
• Abolished the lifetime limit
• For higher earners on the contribution taper the minimum £4k limit rises to £10k [For those on reduced contributions due to earnings over £260k]

This was widely trailed on Tuesday.  The £40,000 limit as been there since 2016, and with inflation would be approaching £50,000 by the end of 2024 in any case.  This will assist with the taper for ‘adjusted earnings’ over £240,000 which seemed to be unchanged.  The limit on contributions for those who have already drawn a pension seems quite naive to me.  This surely just enables “recycling” of pension, by drawing it and putting it back in to wash out a further 25% tax free. Or in other words if you have drawn your pension at 55, you can redeposit £100,000 over 10 years, and get another £25,000 (plus any growth) tax free.  I don’t quite frankly follow the suggestion this will result in tens of thousands of early retirees venturing back to work.   The abolition of the lifetime limit whilst it may assist some senior doctor retentions, this seems very untargeted.  Rather than costing £800 million by 2027/28 as this policy does,  Hunt could have simply exempted NHS pensions from the computation. There seem to be few people paying into pensions over £40,000 as the cost of that is costed at £270 million per annum.  Altogether that is  £1 billion a year of tax relief for higher earners, or about 1/3rd of the cost of giving Nurses a 10% pay rise.

Already Announced

Frozen Personal Tax Allowances from 2022

All bands for Income taxes to be frozen until April 2028

As commented previously this “non change” is the No. 1 biggest revenue raiser here given high inflation.   The prior years ‘red book’ suggested this was worth about £19 billion over 4 years…..or about the outlay on HS2 in this period.  Fixing allowances longer term flatters forecasts a game that has been played for such a long time it ceases to have any credibility.  It also  allows, as I have mentioned several times before, a “big ticket” increase just before the next election. Given you the voter are of course not supposed to spot this I am pointing it out again. Equality watchers will note freezing allowances is essentially regressive as it affects lower earners proportionally more than higher earners.

Additional Rate of Tax

The starting point for the 45% band drops from £150,000 to £125,140 from April 2023

This is a one off cost of £1,243 to anyone with an income over £150,000.  As noted in the Autumn, the “what he hasn’t done” is slightly more interesting as we still have  the claw back of personal allowances over £100,000, so your marginal rates of income tax are 40% to £100,000, 60% to £125,140, dropping back to 45% over £125,140.   This “big bump” in tax rates is pulling in more and more tax payers and often avoided using pension contributions.  This area is very hard to reform as any changes benefit those earning over £100,000 which politically is going to be a difficult sell whatever party you are representing. Like those before him, Hunt has ignored the issue.

Company Car Benefit in Kind

The BIK band for electric vehicles rises from 2% to 3% from April 2025 and by April 2026, 5%

This impacts those driving an electric company car.   The benefit in kind rate is applied to the list price of the vehicle, and you and your employer are taxed on the computed benefit.   This might yet go up, but for now electric company cars, and some hybrids are very attractive from a tax perspective.

Capital Gains Tax 

The tax free band reduces from £12,300 for 2022/23 to £6,000 for 2023/24 and £3,000 for 2024/25

As noted previously, this pulls a lot more small gains into charge and will be relatively fiddly to administer for little in the way of revenue.  On a practical level it is likely that such gains will not be reported for those who do not normally file a tax return. 

Some Key Allowances for 2023/24:

• Employees NI Threshold remains at £12,570
• Employers NI Threshold remains at £9,100

What hasn’t changed? Below I list some major allowances, and in brackets [date of last change, what the rate would be if it kept pace with inflation to Oct 22, and % effective reduction]

• Personal allowance stays at £12,570 [Apr-21, £14,408, 15% reduction]
• Higher rate threshold stays at £50,270 [Apr-21, £57,621, 15% reduction]
• Corporation Tax stays at 19%, but goes up for profits over £50,000 from April 2023 [Apr-17, £61,322, 23% reduction]
• VAT threshold frozen at £85,000 to 2025/26 [Apr-17, £104,247, 23% reduction]
• Mileage stays at 45p for business use of private car under 10,000 miles, and 25p for additional miles [Apr-11 & Apr-02, 61p & 42p, 35% & 70% reduction]
• IHT threshold remains at £325,000 [Apr-09, £476,919, 47% reduction]
• £100,000 threshold for loss of Personal Allowance remains (frozen since 2010) [Apr-10, £141,480, 41% reduction]

Hunt’s main job today, was simple.  Don’t crash the pound.  Don’t have your policies criticised by a footballer. Don’t crash the pound.  On those narrow points it was a resounding success.  Hunt seem to be quite enjoying himself, especially with petty political point scoring over Labour and even enjoyed some banter with the Deputy Speaker.

We got all the normal huff and puff with very little in the way of substance over 65 not very serious minutes.    The biggest splurge seemed to be on 100% capital allowances for large businesses.   Which seems to directly contradict the previous claim that lower rates of Corporation Tax will encourage investment (no, me neither) and also introduces considerable uncertainty for anyone making large investments with rates quite frankly all over the place in the past 5 years.  What big business generally asks for is stability.  Big projects have long time scales, and long payback periods.  Unstable tax policy creates a lot of business risk, and lowers investment in particular from overseas.

Hunt made some highly dubious claims about Britain being a much better place to do business than when Labour were in power.    Well not if you are a small business. By my maths, the tax paid now on profits in a small Limited Company from April 2023 will be about 30% higher now than in 2010.  There was further laughable and I imagine “likely to fail a fact check” comments about a “Brexit pubs guarantee” by er, not upgrading duties on beer in a licenced premises with inflation, which apparently the EU would not allow.  Hmm.  Las time I checked the EU rules allowed wide ranging rules on alcohol duties.

Given the labour shortage one does idly wonder if increasing pension relief would have more effect on labour supply, than I don’t know, processing the 160,000 backlog in asylum claims so the successful claimants can legally work in the UK to pick a random example, or perhaps reducing the high barriers to regular migration.   The House of Commons official briefing  lists a number of reasons for the shortfall. None of which seem to point to people worried about having maxed out their pension.   The ONS suggests the main reason for people being economically inactive is rising numbers of long term sick and more students.  For long term sick, a new review was promised and what sounded like ratcheting up the hated “fit to work tests” rather than any genuine help.

What wasn’t there is more telling.  Nothing for small business. Nothing for low earners. No taxes for highly profitable energy companies. The only cash available was for very wealthy pension pots and large business, and a small amount of extra child care.   As for wage demands for public services – silence.  NHS waiting lists (7 million, some of which are probably out of work).  HS2 massive overspends, ignored.  Science, technology, innovation.  What they?

What is left however, is the massive fiscal drag we have discussed before caused by freezing allowances in a period of high inflation.

Starmer didn’t have much problem in his response; it is a fairly wide open goal and his various tap-ins won’t make Match of the Day.  What will be more interesting is if his party are on the other side of the house in 15 months.  Then its a much harder job.

I normally publish the following tables to give typical extraction strategies undertaken by small Limited Companies. These give the maximum director’s bonus and dividend combinations for company directors to each key “stop” point, of (a) staying basic rate; (b) preserving child benefit; and (c) loss of personal allowance at £100,000 gross income.

This is getting more complex as time goes on, so please treat this as a “loose guide” as your circumstances may of course be different.

The standard salary amount for 2023/24 will by £12,570 in most cases including one and two director companies.

Directors Wishing to Stay Basic Rate

Increase in tax: £87 for no extra drawings

Directors Wishing To Retain Full Child Benefit

Increase in tax: £87 for no extra drawings

Directors Wishing To Preserve Personal Allowances

Increase in tax: £87 for no extra drawings

Alternative Way of Looking at Extractions for Your Limited Company

Your gross income (dividend+salary+other income) should be:

£50,000 if you want to keep all your child benefit

£50,270 if you want to stay basic rate

£100,000 if you want to preserve all your personal allowance

£125,140 if you want to avoid the additional (45%) rate of tax

You can then use the following rules of thumb for how much tax to keep back:

With the new rates of Corporation Tax, decision making about what salaries to pay and what expenses to book through your small limited company become more complex, as what used to be sensible can now become bad planning depending on your income level.  The following is an attempt to summarise what will work in most situations, and I will talk to clients on an individual basis about what will work for you, typically with your year end.

The table below summarises the marginal rates of tax, combining Corporation Tax, and Dividend Taxes, at different profit levels, and if the owners are a higher or basic rate tax payer for that drawing.

In practice, sole company directors will be Basic Rate for the first £50,000 of profit and then move to the Higher Rate once company profits reach £50,000, with the associated jump in tax rate from 26% to 51%.  This is a very long way indeed from the position in 2016 with marginal rates of 20% and 40%, aimed at encouraging small business.

So What Does This Mean for Tax Planning?

For many of our clients we will be trying to keep your profits down below £50,000 by adding in as many legitimate costs as possible, and in particular trying to ensure the company pays for all the costs if can do so tax efficiently, rather than the individual paying for it out of their net income.

Always Good

The following costs are “no brainers” for virtually all clients, regardless of income.

• Small director’s salary up to £12,570 [see notes below on this]
• Gross Company Pension Contribution
• Electric vehicle as a company car [25 to 30% saving, reducing over time due to tax change and initial age of vehicle]
• Hybrid vehicle as a company car [5 to 10% saving again benefits reduce over time, and initial age of vehicle]

Good For Profits Over £50,000

if your business profits, after directors’ salaries, pensions and other sums still exceed £50,000, then may want to look at some more marginal items.

• Benefits in kind, so the likes of private medical insurance, are *mildly* beneficial, but there is not a lot in it. Under £50,000 profit it will be more tax.
• Electric vehicle as a company car [35 to 40% saving, reducing over time due to tax change and age of vehicle]
• Hybrid vehicle as a company car [10 to 20% saving again benefits reduce over time, and age of vehicle]

All in all this means more complexity around your small business, and inevitably higher compliance costs.  Putting in a company car is fiddly, albeit worthwhile for the current tax breaks if you go electric. Some clients may well prefer to keep their business simple and chase business revenue rather than marginal tax savings.

Directors Salary Levels

This is again quite complex.  Sole directors with no other employees will pay no National Insurance up to  £9,100 annually, but assuming a salary of £12,570, Employers NI arises of £478.86.

Employer’s NI does not arise when you have two directors as you can claim the Employment Allowance which pays for the first £5,000 of Employers National Insurance.  Similarly if you have a regular employee you may have some of the Employment Allowance remaining you can use for your own salary.

Historically, we have tended to “keep it simple” and avoid paying any Employer’s NI, even in situations where there has been a small benefit.

From April 2023, for business with a profit of less than £50,000 before tax, the exact benefit of paying the higher rate of Employer’s NI will vary depending on the other income of the director but will be broadly £270 per company.

If your profit is between £50,000 and £250,000 this saving increases to £567.

We consider this is enough of a saving to now recommend this as standard policy, albeit if you have other income (such as rents) using up your basic rate allowance then this may not be optimum, especially on profits under £50,000.

We will circulate notes about this later in the year and how to pay the Employers NI, where applicable.

Should I pay higher salaries still? 

Short answer, no, as you will also be paying Employee’s NI of 12%. Even if you have unused Employment Allowance the benefit is negligible in most cases, albeit not all.  Once your Employment Allowance is fully used up, there are no common situations when a salary will be beneficial.

Company Tax Issues in more Detail

Some of our clients like to understand what is going on in more detail, so to explain a few key points:

Why is the marginal rate of Corporation Tax 26.5% and not 25%?

Since 2014, there has been one rate of Corporation Tax for all businesses.

However from April 2023 the rate of 19% will apply only to profits of £50,000 and less, and the full rate of 25% will apply to profits over £250,000.  Unlike Income Tax or SDLT, the rate is computed with a claw back, which mean Limited Companies earning between £50,000 and £250,000 will have a marginal rate of tax of 26.5%, so as to reach an average rate of 25% by the £250,000 profit level.  Under the old pre 2016 system the ceiling was much higher, £300,000 for the start of the taper.

I should point out businesses which straddle the year end, so have for example a December 2023 year end, will have a hybrid rate with 9/12th at the new rate, and 3/12ths at the old, which I am not going to consider here in detail.

Isn’t the marginal rate of total taxes actually 60%?  Corporation Tax + Dividend Taxes?

Not quite, as the Dividend Taxes are only paid on income already subject to Corporation Tax.    So to run the numbers, for every £1,000 you make between £50,000 and £250,000 of company profits, you pay £265 in Corporation Tax.  This leaves profits of £735 from which a dividend can arise. The tax on that dividend becomes £248;  Leaving you with just £487. Or 51.3% in taxes.

For a basic rate tax payer, your marginal rate of tax will be 32.9%.

If I have second Company, can I have two £50,000 limits?

No, is the short answer.  If you have two or more companies under common control the £50,000 band will be divided between the businesses, so you have £25,000 in each one.   In some circumstances, where there is no commercial interdependence, then it will be possible for (say) a husband and wife to operate separate companies, and have their own £50,000 band, but this is quite delicate.

Should I close the company and be a Sole Trader?

The benefits of a small Limited Company are much less than they have been in the past, and we are now reluctant to incorporate new businesses with a profit before payments to owners under £50,000 as the extra costs are likely to swallow any tax savings.  However there is still a broad tax advantage for small Limited Companies from £30,000 profit which peaks at around £2,500 for profits of £60,000.  The main tax advantage is really one of timing, in that you can chose when to take profits and so optimise use of your tax free allowances.   There can also be basic business reasons for choosing a company, such as limited liability and credibility, therefore they are not dead yet.  It is interesting to note that for large earners who are looking to draw all their income, there are few tax reasons for choosing a company beyond £175,000 profit unless your income is variable.

A few clients have asked me what has happened to my bete noire.

To recap, way back in 2015 it was announced that from April 2018 all sole traders, partnership and landlords with a turnover over £10,000 would be merrily filing quarterly figures in addition to the annual tax return.  The aim was “efficiency” for small businesses through effectively compulsory digitisation of record keeping.  Small Limited Companies were to follow.

So where are we with this now?

Well the new deadline having been put back and back, year after year is now April 2026 for a turnover over £50,000 (sole traders or landlords) and April 2027 for turnovers over £30,000.  A mere 9 years after the initial launch date.  The was to be a “review” for business with a turnover between £10,000 and £30,000 but this seems to have been dropped and there seems to be no requirement for thresholds under £30,000.

Behind the scenes the project is in tatters.  The pilot has a handful of users (largely software developers), and is closed to new joiners.  No software is available for anything other than very basic situations. A huge number of fundamental issues remain unsettled in terms of the basics of reporting periods, corrections, and indeed, what the data will actually be used for.  Software developers who have been rubbing their hands with glee and heavily pushing this project are abandoning ship and not best pleased with the continued delays and lack of a firm specification to code to.

In flying pig terms, the project has not yet resolved how the wings are going to work on a standard sized pig and just hoping the solution will also work on all breeds and sizes.  None of the remaining team dares acknowledge that a functioning system will require not just all the pigs aloft, but the whole farmyard, including the fowl who can fly anyway, but will have to fly using the universal farmyard solution.  The fundamental question of why the animals need to fly in the first place is being quietly debated, privately at least.

This is a classic government IT project failure in action.   We seem to be getting to beyond the denial stage, past anger with the profession for pointing out its many flaws, and into bargaining and potentially even sullen depression.  Acceptance of failure may be a few years off, but it looks to be on its way, but like all good zombies may yet rise from the grave and come back to frighten everyone in a while.

So what do I need to do?

Well apart from tutting and rolling your eyes like my 12 year old twins, nothing much.

I would however come back to the point that having all your business banking flowing through a dedicated bank account, is generally good thing from a bookkeeping point of view regardless of HMRC’s software dreams.