Preparing for the Spring tax changes

With a new financial year comes new tax rules. As changes loom from April 1st and April 6th, now is the time to get your personal and business affairs in order. Business owners can save on taxes by doing some sensible planning to stay ahead of new legislation.

Gary Heywood explains the new rates you need to be aware of as well as how you can optimise your finances to protect your business.

What changes are coming?

After an especially dynamic year, with several Chancellors and Prime Ministers, changes for the coming financial year reflect plans mooted in 2021, the mini-budget in 2022 and new changes made since. Headlines are:

• Corporation Tax is increasing from 19% to 25% from 1 April 2023. The 19% rate will still apply if the company's profits are £50,000 or less, but more tax will be paid on profits above this level. Companies with annual profits of £250,000 or more will pay the full 25% rate, while between the two rates, a system of marginal relief will apply.
• From 1 April 2023, the SME R&D enhanced deduction (R&D tax credit) will decrease from 130% to 86%, while the SME R&D credit rate, taking the cash option, will decrease from 14.5% to 10%.
• The 130% super-deduction available to companies on capital expenditure in their first year will end on 31 March 2023.
• The annual tax-free allowance for capital gains tax will be reduced from £12,300 to £6,000 in April 2023.
• Dividend Allowance will drop from £2,000 to £1,000 from 6 April 2023.
• The threshold for the highest rate of income tax (45%) is reduced from £150,000 to £125,140 per annum from 6 April 2023.

What businesses can do

Increases in taxes have a direct impact on the profits you can withdraw from your business, as well impacting your flexibility when it comes to future spending and investment. By working proactively, businesses can make the most of the time available before new rules kick in, especially when it comes to managing corporation tax obligations under the new rules.

Optimising allowances

Before they expire at the end of the tax year, it’s important to check if you've used all your allowances, including big ones like tax relief on pension payments. Consider whether you can afford to maximise your pension contributions. Owners should also consider fully utilising their annual ISA allowance of £20,000, and should take a look at investment products such as VCTs, EIS, and SEIS where tax relief can be up to 50%, taken against your income. Speak to your IFA now to understand how this can help reduce the income tax you pay.

Investment timelines

While changes in the R&D tax credits are aimed at strengthening the rules and blocking spurious claims, the implementation is still subject to review and feedback. However, for businesses who enjoy significant tax relief here, try and complete projects before April. In any event push the R&D spend now, if of course you have the cash. Similarly, the extremely preferential ‘super-deduction’ of 130% relief on capital spend ends on 31 March 2023. if you’re looking at new equipment purchases, buy now.

Managing profits

With the upcoming increase in corporation tax, maximising profits before the tax rate changes is an option, if it can be done. Consider completing projects or billing before the start of April to take advantage of lower tax rates in this period, accelerating timelines and work flows as necessary.

Managing income going forward

For the large number of business owners who blend their income between salary and dividends, the new rules will change the calculations on balancing the two. The rise in corporation tax from April 2023 may mean that some owners are better off increasing their salary, as a pre-tax deductible expense for the business, rather than relying on post tax dividends as much.

The lowering of the income threshold before the highest rate of income tax kicks in could warrant a look at super dividends or bonuses being paid before 5 April 2023, again subject to cash needs. Have your accountant run some scenarios.

The right strategy for you and your business will depend on your unique circumstances, as well as the expense and revenue profile of your business, in line with the rest of the changes coming in April.

If you’re looking for support to understand how these rules will affect your business, get in touch.