As we have done in previous years, we want this note to act as a prompt to remind you that we are ready to begin work on your 2022-23 tax return, which we hope will act as a prompt to get your papers ready sooner rather than later.
- We are all going to pay more tax … probably
My main message this year is one of expectation management. Unless your circumstances change materially, you will pay more tax, certainly in 2023/24 and in the years that follow.
So why is that? The reason is fairly simple – inflation has been running above 7.5% since April 2022, while the thresholds at which higher tax rates begin to apply remain unchanged. Incomes will rise but the point at which higher tax rates kick in remain unchanged, and in the case of dividends and capital gains tax, will be lowered.
Those receiving a State Pension in 2023/24 will have seen an increase of 10.1% (on average). Meanwhile, the higher rate income tax threshold – the point at which the higher tax rates kick in (40% for Income Tax, 33.75% for Dividends and 20/28% for Capital Gains Tax) – remains unchanged at £50,270. There will be less bandwidth available for taxable income to be taxed at basic rates.
For most taxpayers, it will simply be a case of having to accept this situation as a fait accompli. From a tax planning point of view though, it is worth reminding you about the potential for tax saving from charitable donations, or private pension contributions. Pensions have suddenly become a hot topic, and I cover this in detail later in the note
- Planning for your 2022-23 Tax return
The tax return and the tax computation for 2022/23 will be broadly similar to last year. The tax-free Personal Allowance remains at £12,570, after which income is taxed at the basic rate of 20% up to £50,270. The Higher Rate tax of 40% applies up to £150,000, after which income is taxed at 45%. The Personal Allowance begins to be lost at £100,000, until it is all lost once taxable income reaches £125,140. Between £100,000 and £125,140 the marginal rate of tax is either 60% or 53.75%.
The main changes in the 2022/23 are the higher rates of tax on dividends, where there is an increase of 1.25% on all dividend income above £2,000. For those with taxable income below £50,270, the basic dividend tax rate of 8.75% applies, above £50,270 the higher dividend tax rate is 33.75% and the highest rate, where taxable income is above £150,000, is 39.35%.
The Dividend Allowance remains at £2,000 for 2022/23, while the Basic Rate Interest threshold of £1,000 and Starting Rate for Savings of £5,000 are also unchanged.
Another difference in 2022/23 concerns the rates and thresholds for National Insurance (‘NI’). The rates of Class 1 NI (on employment income) and Class 4 NI (for Self-Employment income), and the thresholds at which those rates apply were changed three times during the 2022/23 tax year. In April 2022, the rates of NI were raised by 1.25%, then in July the thresholds at which those higher rates apply were raised, and by November the rates had been reduced back to previous levels. For those with employment income, Class 1 NI has already been deducted. For those who are self-employed, Class 4 NI will be applied at a blended rate of 9.73% on net income above the threshold of £11,908.
- Tax changes for 2023-24 and Beyond
Corporation Tax – New regime from 1 April 2023
Corporation tax reforms have come into effect from 1 April 2023. For the financial year 2023, companies with profits below the lower limit (set at £50,000 for a standalone company) will continue to pay corporation tax at the rate of 19%. Where profits exceed the upper limit (set at £250,000 for a standalone company) corporation tax is payable at a rate of 25%. Between £50,000 and £250,000, corporation tax is paid at a marginal rate of 26.5%, giving an effective overall rate of between 19% and 25%.
The lower and upper limits are reduced where the company has one or more associated companies, or where the accounting period is less than 12 months.
Income tax
The 2023/24 tax year starts on 6 April 2023. The personal allowance remains at £12,570 and is frozen at this level until 5 April 2028. The basic rate of tax remains at 20%, the higher rate remains at 40% and the additional rate at 45%. The basic rate band remains at £37,700, meaning that for someone with a personal allowance of £12,570 higher rate tax is payable once income reaches £50,270.
However, from 6 April 2023, the additional rate threshold is reduced from £150,000 to £125,140. This is the point at which the personal allowance is fully abated.
Capital gains tax
The capital gains tax annual exempt amount is reduced to £6,000 for 2023/24 and to £3,000 for 2024/25, reducing the opportunity to realise gains free of capital gains tax.
The rates remain unchanged – at 10% where income and gains do not exceed £37,700 and 20% thereafter, with higher rates of, respectively, 18% and 28% applying to gains on residential property and carried interest.
Taxation of dividends
Dividend tax rates are to remain at their 2022/23 levels, so for 2023/24 dividends will be taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.
The dividend allowance is to fall to £1,000 for 2023/24 and to £500 for 2024/25. This will impact on the profit extraction strategy if you run an owner-managed or family limited company and extract profits as dividends.
VAT
VAT Thresholds also remain unchanged, and those businesses nearing the threshold find themselves in a dilemma, where successful business expansion can result in having to register for VAT and automatically putting their prices up by 20%, which immediately has the potential to make them uncompetitive. Surely, as Dan Neidle, the tax specialist whose investigation exposed ex-Chancellor Nadeem Zahawi’s incomplete tax reporting, has argued, it is time to introduce a stepped approach to VAT with lower rates for smaller businesses operating just above the VAT threshold.
- Pensions
Pension planning has become one of the hot topics in 2023/24, mainly as a result of changes brought about by Chancellor Jeremy Hunt’s March 2023 budget. At a high level, he made two significant changes for those with personal and/or company pension schemes:
- The Annual Allowance – which is the maximum amount on which tax relief on pension contributions is granted in a single tax year – was increased from £40,000 to £60,000.
- The Lifetime Allowance – a cap over which tax relief on total lifetime pension contributions, which was previously set at £1,070,000 in 2022/23, was abolished.
As accountants, we have to be very careful about advising on pensions, and on stepping over the boundaries of what we are qualified to advise on. There is clearly a close link for many between tax planning and pension planning. What we can do as accountants is to advise on the tax benefits of making pension contributions, and I wanted to highlight a couple of areas that have been a point of discussion with clients:
The State Pension – the availability of online information for the State retirement pension has improved a lot in recent years. People can access their forecast State Pension via a personal government gateway account, which will give them the opportunity to look at whether they want to look to top up the pension by making additional contributions.
To qualify for a full state pension, you need 35 qualifying years if you reach state pension age on or after 6 April 2016. If you have less than 35 qualifying years but at least ten qualifying years, you will receive a reduced state pension. Individuals who reached state pension age before 6 April 2016 needed only 30 qualifying years to secure a full state pension.
As a result of the increase in the number of qualifying years needed for a full single-tier state pension, a longer window applies in which to make voluntary Class 3 contributions for the tax years for 2006/07 to 2015/16 inclusive. Contributions for these years can be made until 31 July 2023. They must be made at the 2022/23 rate of £15.85 per week.
Personal Pensions for the Self-Employed – there can be two tax benefits of making personal pension contributions. Firstly, any qualifying contribution is topped up by the government by 20% so you can build up a pension pot with that uplift – the ‘quid pro quo’ being that you get taxed when you withdraw the pension (although you can get the first 25% of a drawdown for free). Secondly, you can use personal pension contributions to pay less tax. If you are a higher rate taxpayer with employment, self-employment or property income, for every £1 you invest in a personal pension (up to the annual allowance, which is now £60,000), HMRC raise the threshold at which higher rate tax rates is applied by 1.25%.
Limited company pension route. For taxpayers whose taxable income is primarily sourced from salary and dividends from Owner-managed limited companies, the best approach is to make pension contributions via the limited company, where the tax saving will be on corporation tax rather than income tax. This is because dividend income does not qualify as taxable income against which personal pension contribution applies. For limited companies with profits above £50,000, additional pension contributions will become more attractive as the tax savings will be at 26.5% or 25%.
- The State of Play at HMRC
Our job as tax agents, whether we like it or not, is to ensure our clients comply with company law and pay the “right” amount of tax. We can obviously advise on the optimum use of the tax rules, such as setting director salaries or paying dividends at a particular time or suggesting the benefits of making pension contributions or charitable donations. But we are, indirectly, tax collectors for the Government.
It has not been a good year for HMRC. Through no fault of their own, they briefly found themselves overseen by someone they had been investigating for potential tax avoidance. That was not their problem. On the other hand, the postponement of the MTD ITSA plans was an own goal – the initial scope was too broad and too ambitious.
Meanwhile, the reduction in service levels has been extremely disappointing. It was understandable that service levels would be diminished during the lockdown, but things have not returned to normal after lockdown. It appears that there are fundamental organisational issues with HMRC, where the people at the top of the organisation either don’t understand the day-to-day issues of staffing and training, or do understand, but are unable to do anything about it. An indication of staff motivation levels is that HMRC staff are on strike for much of May & June 2023.
HMRC staff that we speak to are often very professional and helpful, once we get through, but seem unable to escalate issues or change things from the bottom up. We are now in the second period in the calendar year, where we have been asked not to contact the HMRC agent helpline. The spin that HMRC are focussing on the roll out of limited online services belies fundamental problems within the organisation.
- Making Tax Digital for Income Tax ‘ITSA’ – DELAYED
The start date for Making Tax Digital (MTD) for Income Tax has been delayed. It was due to have come into effect for unincorporated businesses and landlords with business and/or rental income of at least £10,000 from April 2024.
Under the revised timetable, MTD for Income Tax will now apply from 6 April 2026 to unincorporated businesses and landlords with business and/or rental income of at least £50,000. It will be extended to unincorporated businesses and landlords with business and/or rental income of at least £30,000 from 6 April 2027.
No date has yet been announced as to when it will apply to unincorporated businesses and landlords with business and/or rental income of less than £30,000.
- Basis Period Reform
Despite the delay to MTD for Income Tax, the reform of the basis period rules will go ahead as planned.
What is a basis period and what does the reform mean? A basis period is a period, usually of 12 months, for which a Self-Employed taxpayer prepares a set of accounts for inclusion on the tax return. Previously there has been flexibility on the accounting year end date.
Going forward, every taxpayer will need to use either 31 March or 5 April as the basis period end. In the transition year 2023-24, we will need to prepare accounts for extended periods, for example for 15 months from 1 January 2023 to 31 March 2024. Tax will be paid in the usual way on the 12 month period but an additional tax charge will be raised on the transitional three month period, and that tax bill will be paid in instalments over the subsequent 5 years.
From 2024/25, unincorporated businesses will be taxed on the profits for the tax year, which will end on either 31 March or 5 April. The 2023/24 tax year will be a transitional year to move from the current year basis to the tax year basis.
- Russia, Ukraine and the focus on Anti-Money Laundering
As members of a professional body, we are subject to professional practice review, in our case by the ICAEW. We had a review in 2021, and even then, before the Russian invasion of Ukraine, there was a significant focus on Anti-Money Laundering controls. These controls have been in place for many years, and banks in particular have often been exposed for their failure to apply “Know Your Customer Rules”. A year into the conflict, with sanctions being imposed on Russian assets in the UK, I think the understanding of the importance of Anti-Money Laundering is much better understood. It is not simply a case of asking for proof of ID and proof of address these days. It is crucial, as the Russian sanctions have revealed, that we understand the true source of funds. We will be updating our AML records for many of you, and I ask for your patience and understanding as we do that.
- Key Tax Rates and Thresholds for 2022-23 and 2023-24
In these tables we are publishing some key tax rates for both 2022-23 and 2023-24. The 2022-23 rates will be relevant for the next Self-Assessment Tax Returns due for submission by 31 January 2024. The 2023-24 rates will be relevant for any income and expense you have from 6 April 2023.
Frozen until 2026
| 2022-23 | 2023-24 | Notes | |
| Upcoming Tax Return | Upcoming tax year | ||
| INCOME TAX & SAVINGS | |||
| Personal Allowance | £12,570 | £12,570 | Up to £100,000 |
| 20% Basic Rate Upper Limit | £50,270 | £50,270 | See ** below |
| Dividend Tax Rates | Rates applicable to both years | Unused Personal Allowance can increase the 0% band | |
| First £2,000: 0% Basic Rate: 8.75% | First £1,000: 0% Higher Rate: 33.75% Highest Rate: 39.35% | ||
| Personal Savings Allowance | Rates applicable to both years | ||
| (‘PSA’) | £1,000 of interest tax free for Basic rate taxpayers £500 for Higher Rate taxpayers | ||
| Nil Rate for Savings | £5,000 | £5,000 | |
| ISA Allowance (per person) Junior ISA | £20,000 £4,368 | £20,000 £9,000 | (Lifetime ISA is £4,000 in both years) |
| PROPERTY | |||
| Stamp Duty | Rates applicable to both years | ||
| 0-£125k – Nil | £925k – £1.5m – 10% | With +3% for second | |
| £125k – £250k: 2% | Over £1.5m – 12% | homes / investment | |
| £250k – £925k – 5% | properties | ||
| Rent-a-Room | £7,500 | £7,500 | |
| COMPANIES AND EMPLOYERS | |||
| Employment Allowance on Employers NI | £5,000 | £5,000 | per Company |
| Standard PAYE code | 1257L | 1257L | |
| NI thresholds: Class 1 EmployeeClass 1 Employer | 12% – {between £797 & 13.8% {£4,189 per month | 13.05% – {between £823 & 15.05% {£4,189 per month | Optimal NI free salary: 2022-23: £11,908 2023-24: £12,570 |
| National Living Wage | £9.50 per hour | £10.42 per hour | if 23 or over |
| Workplace pension threshold | £6,240 | £6,240 | Unchanged in 2022/23 |
| Corporation Tax Rate | 19% | 19% to 25% | Rising from April 2023 |
| VAT | |||
| VAT Threshold for registration | Over £85,000 | Over £85,000 | De-registration: below £81,000 |
| Flat Rate Scheme (based on turnover) | Register if turnover is below £150,000 | Up to £230,000 turnover | |
| CAPITAL GAINS TAX | |||
| Annual Allowance | £12,300 £6,150 for Trusts | £6,000 £3,075 for Trusts | |
| CGT Rates | 20%/28%** higher rate 10%/18%** basic rate | 20%/28%** higher rate 10%/18%** basic rate | ** +8% for Residential Property |
| INHERITANCE TAX | |||
| IHT Rate | 40% | 40% | |
| Nil Rate Band | £325,000 | £325,000 | |
| Residence Nil Rate Band | £175,000 | £175,000 | |
| PENSIONS | |||
| STATE PENSION | |||
| ‘Old’ A or B Basic Pension New State Pension full rate | £156.20 per week (‘pw’) £203.85 pw | £141.85 pw £185.15 pw | |
| PERSONAL PENSIONS | The maximum tax-free pension drawdown remains at £268,725 | ||
| Annual Allowance | £40,000 | £60,000 | |
| Lifetime Allowance | £1,073,100 | Not applicable | |
| CHILD BENEFIT | |||
| Child Benefit | £21.80 pw for first child £14.45 for additional ones | £24.00 pw for first child £15.90 for additional | Higher Rate CB charge applies above £50,000 |
** Income Tax rates are slightly different in Scotland and Wales now.
