The last few weeks have been chaotic for the UK government. Due to the ever-changing plans for taxation and investment procedures, business owners especially have been affected.
After then-Chancellor Kwasi Kwarteng’s mini-budget proposals caused government borrowing to rise and the value of the pound to drop at the end of September, his replacement Chancellor Jeremy Hunt stated on 17th October that most of the unvetted proposals would be cancelled.
If any owner-managed business had already begun making decisions for their future operations based on Kwarteng’s proposals, these reversals will have thrown a spanner in the works.
Here’s what you need to know about which tax changes have been axed and which ones owner-managers can still expect to benefit from in the next tax year.
Growth Plan proposals and impact
September’s ill-fated Growth Plan contained many tax cut proposals, but very few, if any, seem to have made it through the new Chancellor’s shredding of the mini-budget. If Kwarteng’s proposals had gone ahead, this is what would have happened from April 2023:
- Instead of rising to 25% next year, with a 26.5% marginal rate applying between £50,000-£150,000, Corporation Tax on profits exceeding £250,000 would remain at the 19% rate.
- The 1.25% Health and Social Care Levy added to National Insurance Contributions since April 2022 would be cancelled and NIC rates would return to 2021-2022 levels.
- The dividend tax rates for 2023-2024 would also have been cut by 1.25%, resulting in a 7.5% basic rate, 32.5% higher rate, and 38.1%
additional rate.
These changes would have made running an incorporated business much more attractive than remaining unincorporated. For example, a business earning profits of £100,000 would have saved £1,500 on their tax bill if unincorporated, compared to a tax saving of £2,700 if incorporated.
Corporation Tax rise cancellation reversed
Owners of limited companies must pay Corporation Tax
on profits, and register with HMRC within 3 months of starting their business. Sole traders and partners pay Income Tax on profits instead.
The single rate of Corporation Tax has been 19%
regardless of profit value since 2015, but there were different rates before this – a main rate and a lower rate for profits under £300,000.
Back in 2021, it was announced that the current single rate was going to rise to 25% on profits over £250,000 in April 2023, with a sliding scale for profits below this amount but above £50,000.
Then, in September 2022, the mini-budget featured a proposal to reverse this Corporation Tax increase and maintain the 19%
single rate – but within a few weeks, this reversal has also been reversed.
This means that the higher rate of Corporation Tax
will be coming into effect next April after all. If your profits are below £50,000, you’ll continue paying the 19% rate, but for profits above that, you could be paying anywhere from 19% up to the full 25%.
However, you may be able to reduce your Corporation Tax liability through R&D tax relief claims, which are also undergoing reform.
Dividend Tax reduction reversed
In April 2022, all dividend tax rates increased by 1.25% – with basic rate taxpayers charged 8.75%, higher rate taxpayers charged 33.75%, and top rate taxpayers charged 39.35%.
Under former Chancellor Kwarteng’s plans, this increase would be cancelled from April 2023, and the rates would return to 7.5%
for basic rate payers and 32.5% for higher rate payers, with the additional rate being scrapped completely.
The aim seemed to be to encourage owner-managers to maintain value in their businesses and invest further in future operations.
However, the increase reversal is what has been totally scrapped. This means that the dividend tax rates will remain as they are, with this year’s 1.25% increase intact, in 2023. Anyone earning over £2,000 a year in dividends will exceed the annual allowance and must pay these rates of tax.
This will be disappointing news for anyone who earns income through dividends, especially small company directors, DIY investors, and pensioners – especially since the accompanying 1.25% increase to National Insurance Contributions is being reversed.
National Insurance Contribution cut maintained
In April 2022, the National Insurance rate went up by 1.25%; this was done as a Health and Social Care Levy to help fund the NHS. For employers, National Insurance Contributions increased to 15.05%, while they increased to 13.25% for employees.
However, the government announced plans to reverse this change just before the mini-budget, taking effect from 6th November 2022. The Health and Social Care Levy was due to be introduced as a separate tax in 2023, but this will also be cancelled.
Since these measures have already begun progressing through Parliament, they will not be reversed like the majority of the mini-budget. Government borrowing is set to replace funding from the Levy, so National Insurance Contributions will return to 2021–2022 levels.
This means that from November, National Insurance rates will be back to 13.8% for employers and 12% for employees (including directors earning £12,570–£50,270, with a 2% rate above that).
There will be no changes to the National Insurance threshold, which was increased from 6th July 2022. The primary threshold for employees will remain at the current amount until at least 5th April 2023, while the secondary threshold for employers still has not been changed.
What is the government doing about tax cuts?
In addition to the Income Tax rates staying the same, these three are the main points that will affect owner-managers and their tax planning in 2023:
- Corporation Tax rise is going ahead
- National Insurance increase is cancelled
- Dividend tax cut is no longer happening
As none of the changes planned in the mini-budget were in force yet, the cancellations are unlikely to have an immediate impact on take-home pay or current financial plans in the next few months.
The government’s back-and-forth on tax policies isn’t making things easy for business owners and investors, but as with any changes to tax rules that could impact you, it’s still a good idea to review your financial plans for the next tax year ahead of time.
The new Chancellor was due to deliver the latest fiscal plan on Halloween (31st October), but this has since been pushed back. Hopefully, there will be no further drastic changes to be announced with the updated tax and spending plan on 17th November.
If you’ve set up a limited company and need professional advice on Corporation Tax, then you may benefit from our tax consultancy services at GBAC. Please contact us to speak with one of our accountants in Barnsley
today.