Save tax by delaying
**PLEASE NOTE THAT MOST OF THE CHANGES BELOW HAVE BEEN CANCELLED**
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Following the chancellors mini budget on 23rd September 2022, you can save tax by delaying bonuses and dividends. You could also save tax by delaying loans, income, and IR35 contracts. Read below to find out what to do.
Save NIC by delaying bonuses
National Insurance Contribution (NIC) rates were increased on 6th April 2022 by 1.25%. This applied to employees, employers and self employed profits. It was actually a healthcare levy which was supposed to go directly to the NHS. But due to the short timescale to set up the levy NIC was increased temporarily. It affected the lowest earners the most, so it was controversial. As a consequence the threshold at which you start paying NIC was increased on 6th July 2022. The threshold is now equal to the income tax threshold of £12,570. This meant that the lowest paid were better off overall.
However, the mini-budget will reverse the NIC increase from 6th November 2022. So NIC is reduced by 1.25% for employees, employers and self employed profits. The increase to the threshold will not change, otherwise the lowest paid would end up worse off.
If you are planning on paying bonuses to employees soon, you should delay the bonus until after 6th November 2022. As a result, both the employee and the employer will pay less NIC on the bonus by 1.25%. So a bonus of £10,000 postponed from October to November will save an employee £125. Also, it will save the employer £125.
Delay dividends to save tax
Business owners save tax by trading as a company, compared to being self employed or an employee. They do this by paying: a low rate of corporation tax; a small tax-free salary; and dividends with either no tax or a low tax rate. Company owners effectively avoided paying any NIC, so saved tax overall. A few years ago the tax rates on dividends was increased by 7.5% to close the gap between company owners and the self employed. There is still a tax saving by using a company but not as much. When the government increased NIC rates in April 2022 by 1.25%, they also increased dividend tax by 1.25%. So the dividends rates increased from 7.5%/32.5%/38.1% to 8.75%/33.75%/39.35%. The reason for this was to maintain the gap between the tax paid by company owners and the self employed.
In the mini budget, the chancellor cut the tax rate on dividends back to old rates of 7.5% etc. Again this was to maintain the gap in the tax paid by company owners and the self employed. However, this change will not take affect until the new tax year starts on 6th April 2023.
So if you can save tax by delaying dividends from the year ending 5th April 2023 to the year starting 6th April 2023. Similar to the NIC savings, a shareholder delaying dividends of £10,000 will save £125.
One way to save tax by delaying dividends, is to take money from your company as a short term loan instead. If the company already owes you that money, it won’t affect your tax by repaying that loan to you. If you end up owing the company money, you can repay that loan by declaring a dividend at a later date and not physically paying that dividend. Instead of physically paying the dividend, you are repaying the loan you took.
For example, let’s say you planned to take a dividend of £10,000 in March 2023. It could cost you tax of £875. Instead, you could take a loan from the company of £10,000 in March 2023. Then from 6th April 2023, declare a dividend of £10,000 which will cost you £750. But don’t pay that dividend, just prepare the meeting minutes/resolution and the dividend voucher. That unpaid dividend will repay the loan taken.
However, if you end up owing the company more than £10,000, you will need to pay interest on the loan at the beneficial loan interest rates. Also, if you owe the company money at the end of its financial year, and it is not repaid within 9 months of that date, it will be taxable. The tax is paid by the company, and eventually repaid to the company after the loan is repaid. The tax payable on loans to directors/shareholders is at the higher rate on dividends at the time the loan was taken. So loans taken in the year ending 5th April 2023 will be taxed at 33.75%. Loans taken after that date are taxed at 32.5%.
So you could also save tax by delaying a loan taken from company from the 2022/23 tax year until the 2023/24 tax year.
Delay profits or income
In the mini budget the chancellor scrapped the planned corporation tax increase from 19% to 25%. So companies trying to increase profit in the 2022/23 tax year, no longer need to. For example, companies may have delayed investment expenditure until 2023/24 to save tax at 25% rather than 19%. Or they could have moved their most profitable work forward from 2023/24 to 2022/23 to pay tax on that work at the lower rate. This is no longer necessary.
However, the reduction of the basic rate of income tax from 20% to 19% means that non-companies could save tax by delaying income. Perhaps employee bonuses planned for March 2023 could be delayed until April 2023 to save 1% of tax. This change also affects self employed profits. So shifting profit from 2022/23 to 2023/24 will save tax at 1%. This could be done by bringing forward any investment in equipment. Or by delaying profitable work.
Delay IR35 contracts to save tax
Since 2017 (public sector) and 2021 (non-small private sector), contractors have determined whether a subcontractor is caught by IR35. That is the Off-Payroll Working rules, which meant the contractor and subcontractor had to pay the same taxes as if the subcontractor was an employee. Many organisations erred on the side of caution with this to ensure they met the regulations. As a result, many genuine subcontractors were taxed as employees despite having more risks and less benefits.
In the mini-budget, the chancellor proposed scrapping the new reformed IR35 rules. This means that from April 2023 all subcontractors can determine for themselves, whether or not they are caught by the rules.
It is unclear at the moment how the transition will work in practice, as many contracts will straddle the 5th April 2023. However, there could be an opportunity to delay a new contract until 6th April 2023 to ensure the subcontractor decides whether IR35 applies. A genuine subcontractor will pay less tax than an employee. This is to reflect the fact they have all the risks of running their own business, and none of the benefits of being an employee. So subcontractors could save tax by delaying a contract.
Other ways to save
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