Tax Planning for 5th April 2023

The current tax year will end on 5th April, so now is a good time for you to check that you’re not going to pay more tax than necessary this year and next year.

HIGHLIGHTS – FROM 6TH APRIL 2023:

• Employees start paying NIC at £12,570pa but the Employers’ threshold remains at £9,100.
• The tax-free dividend allowance is reducing from £2,000pa to £1,000pa, then £500 next year.
• The threshold for the Additional Rate of tax decreases from £150,000 to £125,140.
• Voluntary NIC contributions to top up recent non-qualifying years, is being restricted.
• Corporation tax is increasing from 19% to between 19% and 25% if annual profits exceed £50,000. Will I Pay Less Tax As A Limited Company?
• Directors should take a salary of between £9,100 and £12,570, plus dividends of £37,700.

Below are some suggestions to consider first for directors/shareholders only, then for everyone.

DIRECTORS/SHAREHOLDERS ONLY

Background information

As a recap, it’s important to remember that your company is a completely separate entity from you. A company pays tax on its profits. You pay tax on the wages and dividends received from a company. However, the way you take money from your company may affect the company’s tax, so it is important to consider all taxes when you decide how to pay yourself. A company usually pays a salary to directors, and has the option of paying out its profit (as dividends) to its shareholders. Your company’s taxable profit includes a deduction for salaries and expenses but not for dividends. So a salary will reduce corporation tax but dividends don’t affect it.

Your company will pay corporation tax on the profit it makes in its accounting year, which is usually different to the tax year. The corporation tax rate is currently 19% and will remain at 19% for companies with annual taxable profits of £50,000 or less. Companies with annual taxable profits of over £250,000 will pay tax at 25% from April 2023. Companies between these thresholds will pay a tapered rate between 19% and 25%. These thresholds are divided by the number of associated companies. A company is associated with another company if they are both owned 50% or more by the same person, or the same group of people – read more.

You will pay income tax on your total income in the tax year, including any salary and dividends taken from your company, but not on expenses or loans. See below for the various tax bands and rates.

Even if your corporation tax rate increases to 25%, the most tax-efficient way to take money from your company is still with a small salary and then dividends. That’s because the income tax (20% then 40%), employees NIC (12% then 2%), employers NIC (13.8%) minus corporation tax relief (19-25%) is still more than the tax on dividends (8.75% then 33.75%). Even in the higher rate band when the employees NIC drops to 2%, it’s not enough to claw back the savings made in the basic rate band.

What to do this month

Check that you’ve received trivial benefits from the company of up to £50, up to 6 times per tax year for directors. Trivial benefits can be gifts or vouchers but not cash. The cost of each trivial benefit must not exceed £50.

On or before 5th April make sure you’ve used up your tax-free personal allowance of £12,570 with salary/earnings/dividends.

Last year we advised a salary of between £9,100 and £12,570, depending on whether your company is profitable and whether you would benefit from the Employment Allowance. If you have sufficient profit reserves in the company, you should also pay yourself dividends covering:

1. Any remaining personal allowance after your salary (£12,570 minus your salary);
2. Your tax-free dividend allowance of £2,000, then;
3. Your remaining basic rate band of up to £35,700, taxed at 8.75% (above this dividends are taxed at at least 33.75%).

It’s best to have a similar amount of total income from year to year, rather than not using up your basic rate band one year, then going into your higher rate band in the other year. You will save tax of about £9k by declaring total dividends of £35k this year and £35k next year, instead of none this year and £70k next year.

Any extra salary and dividends don’t have to be paid – they can be credited to your directors loan account to draw out tax-free at a later date, or to repay what you’ve already taken out.

The company must have net profit reserves remaining after any dividends are declared. You must approve the dividend and pay or credit the dividend by 5th April for it to be taxed in the current tax year. As always, you must also prepare the meeting minutes and dividend voucher to support the dividend.

The Changes

The main changes on 6th April 2023 are that: the NIC threshold where employees start to pay NIC increases to £12,570; the dividend allowance reduces from £2,000 to £1,000; and the Additional Rate threshold reduces from £150,000 to £125,140. 

What to do from next month

Our general advice on extracting funds from your own company is set out below. However, due to the numerous scenarios, which could also change during the year, we may advise you differently on an individual basis.

From 6th April 2023, our advice is that each director/shareholder should take money from the company in the following order:

1. If the company is not profitable or if you have other income:
   • Salary of £9,100pa or £758pcm, tax-free
2. If the company is profitable or the employers NIC on your salary is covered by the Employment Allowance:
   • Additional salary of £3,470pa (£12,570pa or £1,047.50pcm)
3. Stop here if the company does not have sufficient profit reserves to pay dividends
4. Dividends of £1,000, tax-free
5. Dividends of £36,700, taxed at up to 8.75%
6. Dividends of £49,730, taxed at 33.75%
7. The next £25,140 of dividends are taxed at 60% (see ‘Avoid’ sections below)
8. The remaining dividends are taxed at 39.35%

This assumes you have no other income and there are sufficient profit reserves in the company to take dividends. Profit reserves are the net profits/losses since the company started, less dividends since the company started. The relevant amounts can be found on the company’s balance sheet within the capital and reserves section.

EVERYONE

Use up Income Tax allowances

To recap, everyone has a tax-free personal allowance. Income above that is taxed at different rates depending on the type of income it is and which band of your income (tax band) that income falls into. Earned income, such as a salary or self-employed profit, use up your tax bands before investment income, such as interest and dividends. So if you have a £50,270 salary and £40,000 dividends, all of the salary exceeding your personal allowance uses up your basic (lower) rate band so will all be taxed at the basic (lower) rate of income tax, then all of the dividends fall into your higher rate band so will all be taxed at the higher tax rate for dividends (except any covered by the dividend allowance so are taxed at 0%).

Unused personal allowances and tax bands are not available to be carried forward, so it is important to check that you are using them efficiently each year. If it’s possible to increase or decrease your income, it’s best to use up the lower rate bands and avoid the higher rate bands. Some tax planning can achieve this, such as changing ownership of assets (e.g. transferring shares of a company and therefore the amount of dividends paid out), or changing employment income or dividends. The bands and rates for Scottish residents are here, and for everyone else in the UK are currently as follows:

• £0 – £12,570 Personal allowance
• £12,571 – £50,270 Basic rate band
• £50,271 – £150,000 Higher rate band (reducing to £125,140 in 2023/24)
• Over £150,000 Additional rate (reducing to £125,140 in 2023/24)

Other allowances and bands to consider:

• £2,000: tax-free dividend allowance per person per tax year. This still counts as income so also uses up your tax bands. This is reducing to £1,000 in 2023/24 and to £500 in 2024/25.
• £50,000 – £60,000: child benefit repaid – see below.
• £100,000 – £125,140: personal allowance withdrawn – see below.

The different tax rates for Income and Dividends are as follows:

Use up National Insurance allowances

National Insurance (NI) is payable by employers, employees, and the self-employed. Each of whom have different bands and rates to consider. As with income tax above, it’s best to use up lower bands and avoid higher bands. You need to have a salary or self-employed profits that exceed the lower earnings limit for the tax year, or voluntarily pay sufficient NI in the tax year, for it to be a qualifying year for your state pension. You need 35 qualifying years for a full state pension. If self-employed profits exceed the main threshold (was the lower earnings limit), a fixed amount of NI is payable at £163.80pa (was £158.60pa). Credits for the state pension will still be gained if profits exceed the lower earnings limit.

Below are the national insurance thresholds and rates for the 2022/23 and 2023/24 tax years. During 2022/23 the NIC rates were increased, then the NIC thresholds were increased, then the NIC rates were reduced! So there are slightly higher thresholds and slightly different rates of NIC as originally advised this time last year.

Check your National Insurance history now

As mentioned above, for a full state pension you need 35 qualifying years of employment or credits. You can check how many qualifying years you have on your personal HMRC online account. If it looks like you will fall short before your statutory retirement age, you may be able to make voluntary NI contributions to add missing years if they are recent enough. From 6th April 2023 the rules are restricted so you can only top up any missing years from just the previous 6 years. See here for more details.

Avoid earning over £50k

As well as paying higher tax rates on income over £50,270, any child benefit received needs to be paid back if income exceeds £50,000 for the year. If one parent or the other receives child benefit, and if one or the other parent has a total income of £50,000 or more, the higher earner will need to repay some or all of the child benefit. A proportion of it is repaid if the total adjusted income is between £50k and £60k. This can result in marginal tax rates of 60% for 2 children and over 70% for 4 children. If the repayment can’t be avoided, consider stopping the child benefit, as this may spare any need to file a tax return. To calculate the amount of child benefit to be repaid, your total income is adjusted down for any personal pension contributions and charity contributions. So you could pay more of these contributions to reduce your adjusted total income within the £50k – £60k band to save tax.

Avoid earning over £100k

When your total income exceeds £100,000 the tax-free personal allowance is gradually removed until you get no personal allowance when your income reaches £125,140 or more. In this band of total income, you have a marginal tax rate of 60% (i.e. your tax bill increases by 60p for every £1 your total income increases between £100k and £125k). Also, more benefits are removed such as tax-free childcare. As with the child benefit above, you could pay personal pension or charitable contributions to reduce your adjusted total income within the £100k – £125k band and save tax at 60%.

Claim Marriage Allowance

A spouse or civil partner who does not pay income tax above the basic rate for a tax year, can transfer £1,260 of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer does not pay income tax above the basic rate. This can potentially mean a reduction in tax liability of £252. 

Transfer assets to a spouse

If a spouse, or civil partner, pays tax at a different rate, consider transferring income-producing assets (e.g. savings, company shares, investment property) to give the income to the person paying at the lower rate.

Check your bank

If you have large sums of cash in ordinary accounts paying very little interest, consider moving cash to other accounts earning a higher interest rate. An Individual Savings Account (ISA) is tax free so make sure that ISA allowances have been fully utilised for all the family, where applicable.

Pay into savings

The ISA maximum subscription limit is currently £20,000 and there is no longer a restriction on the amount that may be invested in a cash ISA. The overall investment limits on ISAs mean that a couple could save a substantial amount in tax-efficient savings accounts. Any adult under 40 will be able to open a new Lifetime ISA. Up to £4,000 can be saved each year (until 50) and savers will receive a 25% bonus from the government on this money. Broadly, money invested in this type of account can be saved until the investor is 60 and used as retirement income, or it can be withdrawn to help buy a first home.

Junior ISAs are available to UK resident children (under-18s). Junior ISAs are tax-relieved and have many features in common with existing ISA products. The maximum annual subscription is currently £9,000. Investments may be made in any combination of qualifying cash or stocks and shares investments. Withdrawals are not permitted until the named child has reached the age of 18, except in cases of terminal illness. It’s possible to transfer Child Trust Funds (CTFs) to Junior ISAs.

Regular sums can be invested in National Savings (some products offer a tax-free return, which is particularly attractive to 40% and 45% taxpayers), banks and building societies. Those willing to accept the possibility of greater risk perhaps equalling greater reward might consider the stock market, stock market-linked investments or buy-to-let property.

Pay into pensions

Paying personal pension contributions can currently give tax relief at the individual’s highest income tax rate. Personal pension contributions are limited to your earnings. Employer pension contributions are not limited to earnings but give tax relief to the employer not the employee. Pension contributions are taxable if the total contributions into all of your pension schemes exceed an annual limit of £40,000 (or less if your total income exceeds £200,000). Unused £40,000 allowances from the previous 3 years can be brought forward and used in the current year if required, which would give a total allowance of £160,000 in one tax year. There is a lifetime pension limit of £1,073,100.

Consider paying into pensions for family members. The introduction of stakeholder pensions allow contributions to be made for all UK residents, even children, as there is no requirement to have any earnings. Consider making payments of up to £3,600 for family members, as the fund will grow in a tax-free environment. The net cost is only £2,880.

Sell some chargeable assets – allowances are reducing

Everyone has an annual capital gains exemption. The exemption is currently £12,300, however this is reducing to £6,000 for 2023/24 and to £3,000 for 2024/25. You are only taxed on total capital gains that exceed the annual allowance. Taxpayers should therefore consider selling taxable assets to make a capital gain up to this figure. Gifts between spouses and civil partners are tax free, so it is possible to double the yearly exemptions available by giving shares or other investments to a spouse or civil partner.

Realise losses

If you have shares standing at a loss, you should consider selling them so that the loss can be set against any gains made over and above the capital gains annual exemption. If you want to retain the investment, it could be bought back by the spouse or partner, within an ISA. It will not be tax effective for them to buy back the investment within 30 days of you selling it. In addition, care must be taken not to fall foul of anti-avoidance legislation which prevents loss relief being claimed where certain arrangements exist, the main purpose, or one of the main purposes, of which is to secure a tax advantage.

Capital gains tax may be deferred through the use of an Enterprise Investment Scheme investment.

Give to charity

Making charitable donations via the Gift Aid scheme is an effective way to reduce taxable income. If donations have been made, it is important that you ticked Gift Aid so that the charity can benefit from the basic rate tax relief. Higher rate taxpayers should make the necessary claim on their tax return for further relief. If future donations are planned, you may wish to bring these forward to on or before 5th April to ensure the tax relief is obtained at an earlier date.

Check your PAYE code

Employees should check that their PAYE tax code number for the following tax year is correct and ensure that any inaccuracies are amended.

Don’t get fined!

There are penalties and surcharges for submitting your tax returns late and for paying any tax due late. These penalties increase substantially over time so if you’re already late for the previous tax year, further delays will cost you more – see here.  If you have a second payment on account to pay as a result of the previous year’s tax return, that payment is due by this 31st July.

Your tax return for the year ending 5th April can be submitted soon after 5th April, so provide your details to us as soon as possible. Look out for our Tax Return Due emails later next month. The balance of tax due for the year ending 5th April plus potentially an extra 50% first payment on account will be due by 31st January.