The April 2023 tax changes at a glance
Personal Taxation
- Increased income tax for higher earners
- Dividend allowance reduction
- Frozen tax rates
- National Insurance rates frozen until April 2028
- Reduced Capital Gains Tax annual exempt amount
- Frozen Inheritance tax thresholds
Business Taxation
- Corporation tax rate increase
- VAT
Personal Taxation
Increased income tax for higher earners
The income tax additional rate threshold (ART) is set to reduce from £150,000 to £125,140 from 6th April 2023. This means more taxpayers will pay income tax at the higher rate of 45% once their income goes above £125,140.
The new threshold will apply to taxpayers in England, Wales, and Northern Ireland.
Scottish higher earners are also set to pay more tax from April 2023. As announced in the Scottish Budget, the top rate tax band in Scotland will also be lowered from £150,000 to £125,140. Scottish taxpayers will also pay income tax at the top rate from April 2023, once their income goes above £125,140.
In Scotland, the higher and top rates of income tax are also set to rise by 1p respectively from April 2023. The higher rate will increase to 42% and the top rate will increase to 47% for Scottish taxpayers. The higher and additional rates for the rest of the UK will remain at 40% and 45%.
Tax tip – consider tax efficient pension saving
Higher rate taxpayers face two tax traps from April 2023:
- Where income exceeds £125,140, you pay the additional rate of income tax, which is 45% (47% in Scotland).
- Also, where your income is between £100,000 and £125,140, you are subject to an effective tax rate of around 60%. This is because, after your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 you go over the £100,000 tax bracket.
You may be able to reduce your tax exposure by making personal pension contributions and charitable donations.
For a basic rate taxpayer who wants to save £100 into their personal pension plan, the effective cost is only £80. For a higher rate taxpayer, to save £100 could effectively cost as little as £60 (£58 in Scotland). The cost drops down further to only £55 (£53 in Scotland) for an additional rate taxpayer.
While potentially extremely tax efficient, there are a number of pitfalls which you should consider before taking action. Importantly, the amount that may be saved into a personal pension is limited, so you should review your position before taking action.
You may also need to take investment advice from a registered pension adviser. We work with TaxAssist Financial Services who can advise you on all aspects of your financial affairs, including independent advice on pensions and retirement planning.
Dividend allowance reduction
Individuals have a dividend allowance each year which means they only pay tax on any dividend income above this dividend allowance.
The dividend allowance will reduce from £2,000 to £1,000 from April 2023, and to £500 from April 2024. The amount of tax you pay on dividends above the dividend allowance depends on your income tax band, and the following rates apply from April 2023:
| Basic rate taxpayer | 8.75% |
| Higher rate taxpayer | 33.75% |
| Additional rate taxpayer | 39.35% |
Tax tip – make sure your remuneration strategy is tax efficient
Recipients of dividend investment income and company owners who extract profits through dividends, will now face higher tax bills resulting from the reduced allowance.
For company owners, you should review your remuneration strategy and speak with your accountant to ensure the way you extract your investment return is done as efficiently as possible.
Frozen tax rates
The freezing of many tax allowances until 2028 means that taxpayers on modest incomes will also pay more tax as inflation bites. The income tax personal allowance of £12,570 is frozen until 2028 and this will impact basic rate taxpayers as more of your income effectively becomes subject to tax.
Tax tip – can transferring assets improve your tax position?
It is possible to gift some or all of any income producing assets you own to your spouse or civil partner and save tax. Generally, for this to work, your gift must be to your spouse or civil partner from whom you have not separated and be an unconditional gift. Professional advice should always be taken, so your individual circumstances can be reviewed prior to taking action.
Basic rate taxpayers may also be able to transfer £1,260 of their unused personal allowance to their spouse or civil partner to save tax. This only applies where neither of you is a higher-rate taxpayer.
National Insurance rates frozen until April 2028
After the rollercoaster of last year, when the National Insurance Contribution (NIC) rates were changed mid-year, they should remain stable from April 2023 onwards. The NIC primary threshold for employees and the Class 2 Lower Profits Threshold for the self-employed will both be frozen until April 2028.
Employers generally start to pay 13.25% Class 1 Secondary NICs on their employees’ wages at £9,100. This threshold will also remain until April 2028.
Tax tip – can you claim the Employment Allowance?
As eligible companies can claim the Employment Allowance to reduce their employers annual National Insurance liability by up to £5,000, you should check if this can be claimed.
Broadly, you can claim Employment Allowance if you’re a business and your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year. Exceptions apply, the most important being that you can’t claim if you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold and the employee is also a director of the company.
Reduced Capital Gains Tax annual exempt amount
From April 2023, the Capital Gains Tax (CGT) exemption most individuals can claim will reduce from £12,300 to £6,000 and again to just £3,000 from April 2024. For anyone selling assets liable to CGT, they need to factor the additional tax which may arise from the reduction in the allowance.
Tax tip – make use of tax efficient investment options
Where you hold eligible investments outside of an ISA, you may have to pay CGT on any gains you make over the allowance. Now is a good time to consider making future savings within an ISA and potentially switching some investments into an ISA. Shifting investments into an ISA, can count as a taxable event for CGT purposes, so you should review your situation before taking action.
You should consider the need to take investment advice from a registered financial adviser and we work closely with TaxAssist Financial Services who can offer independent investment advice and a full range of services for your financial planning needs.
Frozen Inheritance tax thresholds
The inheritance tax (IHT) nil-rate band of £325,000 will be frozen until April 2028. In addition, the residence nil-rate band will also be frozen at £175,000. The residence nil-rate band taper will be frozen at £2 million.
Tax tip – consider an IHT review
According to HMRC, IHT receipts for April 2022 to January 2023 were £5.9 billion, which is £0.9 billion higher than in the same period a year earlier.
The nil-rate band freeze, coupled with rising house prices have caused more IHT to go to HMRC and for estates which may become liable to pay IHT, there are several steps which can be taken to reduce exposure to tax. For individuals whose estate will fall into the IHT net, the main point is to act sooner rather than later and consider taking specialist advice.
Business Taxation
Corporation tax rate increase
The single biggest tax increase facing UK businesses is the rise in corporation tax from April 2023.
The rates will increase as follows:
- The main corporation tax rate is set to increase to 25% where profits exceed £250,000.
- A new ‘small profits rate’ of corporation tax of 19% will apply where profits are £50,000 or less.
- For companies whose profits range between £50,000 and £250,000, they will be eligible for marginal relief such that profits in the margin (falling between the upper and lower limits), will pay an effective rate of tax of 26.5%.
- The upper and lower tax limits are reduced in proportion to the number of companies which are associated for tax purposes. Companies will be associated where one has control of the other, or where both are under common control.
Tax tips
Company owners should take action to ensure they are as tax efficient as they can be and consider the following:
Corporate structure
Companies with common control issues or group structures, should consider the associated company issue to see if restructuring could be undertaken to save tax.
Research and development tax credits
If you have developed new or improved products or processes, you should check if you are eligible to make a claim as valuable tax relief may be available. Reforms to the R&D scheme come in from April 2023, so you should review any potential claims to determine what valuable relief you can unlock.
Use of losses
Previously, companies which have suffered trading losses would ordinarily carry this back to a previous year and generate a tax refund at 19%. A company may be better off to carry forward the loss and obtain a tax refund as high as 26.5%. Balancing the cash flow advantage of a refund at 19% with the potential to obtain a higher refund at a later date is an important consideration.
Bad debts
Businesses should check their debtors and ensure any bad debts are appropriately dealt with. You don’t want to pay tax on income you will never receive.
Stock
If your business carries a lot of stock, check to see if you can make a specific provision against any slow-moving or damaged stock.
Employing family members
For some businesses it may be appropriate to consider employing spouses and family members. Restrictions apply here and wages must be justifiable and at a commercial rate.
VAT
The VAT registration and deregistration thresholds will also be frozen at £85,000 and £83,000 respectively for a further period of two years from 1st April 2024.
Tax tip – switch VAT schemes
Switching to a different VAT scheme could potentially reduce the administrative burden or defer the time when VAT becomes payable.
Give your business a head start today
Dedicating time now to look ahead at the financial year, will mean you will have a comprehensive plan in place for the coming months. If you need any help or advice with the financial aspects of running your business, please call us today on 0800 0523 555 or complete our online enquiry form.
Last updated: 24th February 2023