Budget Autumn 2021
Impact on Owner Managed Businesses
This budget was, for the main part, one that confirmed things rather than announcing much that was new. This tends to be good as it provides a more stable tax environment and one where businesses can plan ahead. It will however leave many wondering when the reforms to Capital Gains Tax and Inheritance Tax, that have been anticipated for a few years, will actually arrive.
In light of this, the items below cover not only things that were announced but items to be aware of for the 2022-23 tax year.
Corporation Tax – Tax Rates from 2023
It was confirmed on 27 October 2021 that the intended corporation tax rate increase to 25% will be going ahead in April 2023. We have just under a year and a half to prepare for this tax hike.
From April 2023 the corporation tax system will return to having two rates of tax and a tapering calculation to attempt to avoid a cliff-edge of tax for companies. Companies earning over £250,000 in taxable profit will pay 25% corporation tax. Those earning £50,000 or less in taxable profit will remain taxable at 19%. For those in between these two values, the rate will increase on a sliding scale from 19% to 25% depending on how close to £250,000 your taxable profits are.
This lower rate only applies to trading businesses (it excludes investment companies, such as those that hold property investments). There are also some exceptions of this rate for companies in a group, or that have associated companies. More complicated business structures will have an added layer of complexity in calculating the rate that might apply.
Essentially if you own more than one company the £250,000 banding is divided by the number of companies you own. For example, if you have three trading businesses each business would have the tapered corporation tax rate applied for profits up to £83,333 of profits (£250,000 divided by 3). If one of the three businesses had profits of £200,000 it would pay the full 25% on those profits. If another of the businesses had profits of £10,000 it would pay tax the 19% rate.
Corporation Tax – Super Deduction
The super deduction continues until March 2023. This is where a limited company buying a new item of equipment will receive an enhanced tax deduction allowing 130% of the cost against profits to reduce the tax bill. This means that for every £100 spent on applicable plant and machinery it will save £24.70 of Corporation Tax rather than the usual £19.
There is an official government information sheet available that gives a little more detail on the sorts of assets that are eligible for the relief. Essentially the things to note are that this is only applicable to limited companies, the item bought must be new and it specifically excludes cars and electric cars. However solar panels and electric vehicle charging points are allowable items.
Vans and trucks are also considered plant and machinery and so are included in this allowance.
Annual Investment Allowances
Although the majority of our clients are not likely to spend more than £200,000 on capital equipment, it was announced that the planned reduction of the Annual Investment Allowance from £1million to £200,000 would be postponed to April 2023.
The Annual Investment Allowance is available to most businesses including limited companies, partnerships that do not have a corporate partner, and sole traders. The allowance gives relief for any assets bought that are not eligible for the super deduction, allowing the full value of the asset to be offset for tax purposes in the year of purchase.
Traditionally the cost of an asset is released over time, but this popular tax relief has been in place for many years to encourage businesses to invest in their own growth.
This means that buying a second-hand van for £35,000 would save a limited company £6,650 in the year of purchase.
It is important to note however that the Annual Investment Allowance excludes cars and where the allowance is claimed on an asset it also means that if in the future you sell that asset to someone else, the full sale value is taxable in the year of disposal at your normal tax rates.
End to the Extended Loss Carry Back Relief
The extension to the rules on carrying back losses will end on 31 March 2022. If losses were made in any accounting period ending between 1 April 2020 and 31 March 2022, the losses made can be carried back against the three previous years to claim a tax refund. This is open to all types of business, although companies that are in a formal group are limited to a cap of £2m of losses utilised across the whole group.
The carry back is the best way of ensuring that losses result in the fastest possible cash injection for a business, however as the tax rates for unincorporated businesses are increasing in 2022 and limited companies face an increase in 2023, you may want to consider if this is going to be the best option for your business based on your forecasts.
Increases in Personal Taxes
Although it wasn’t mentioned in this budget at all, with the bad news having been given back at the start of September it is an important thing to note here.
Just to note, the words “National Insurance” were only written four times in the whole of the full 200-page budget report, while the words “levelling up” were printed 92 times. Showing just how much this budget was intended for a positive spin rather than focusing on the tax changes in 2022.
For full details of the National Insurance and Income Tax rates see the tables below.
The increase in National Insurance and Dividends Taxes means that no matter if you are an employee, self-employed, or a limited company owner-manager you will be facing an increased “tax” bill next tax year. This is on top of the freeze in the personal allowance and income tax bands which means when adding on inflation in the economy there is a significant increase in tax in “real terms”.
National insurance for the self-employed
Annual earnings up to c. £9,800*: 0%
Annual earnings between c£9,800* and £50,270: 10.25%
Annual earnings above £50,270: 3.25%
This is on top of the rates payable for income tax (0%, 20%, 40% or 45% depending on level of income) and the flat rate of Class 2 National Insurance paid when profits exceed £6,515, which is an additional tax worth c.£158.60 per year.
National insurance for employees and employers
Employers will pay an increased level of National Insurance on all wages over the “Secondary Threshold” (expected to be c. £760 per month*) at a tax rate of 15.05%.
Monthly earnings up to c. £821* per month): 0%
Monthly earnings between c£821* and £4,189: 13.25%
Monthly earnings above £4,189: 3.25%
*We are awaiting confirmation by HMRC for the National Insurance bandings as these are expected to be increased by September’s Consumer Price Index. The “Upper Earnings” and “Upper Profits” limits have however been confirmed to not be changing from the 2021-22 levels.
The increase in taxes – labelled as the “health and social care levy” – also increased taxes payable on dividends.
After utilising any personal allowance and assuming no other income affecting your tax bands the tax rates for dividends recognised in the 2022-23 tax year are as follows:
First £2,000 of dividends: 0%
Dividends of between £2,000 and £37,700: 8.75%
Dividends of between £37,700 and £150,000**: 33.75%
Dividends above £150,000: 39.35%
** Note that when total earnings exceed £100,000 the personal allowance is reduced by £1 for every £2 of earnings over this threshold until there is no personal allowance remaining.
While we are yet to have the rates confirmed to provide our recommended salary and dividends levels for owner-managed limited companies, we expect the annual personal tax liability for someone earning £50,270 via salary and dividends to be c. £3,124 payable personally on a tax return. This is after having to pay a minimum of £9,652 of Corporation Tax to secure the profits needed to vote these dividends.
A single owner/director company with no employees would therefore be paying a total of £12,776 in taxes to secure the full basic rate of income. A sole trader earning the same amount would pay £11,840 in taxes.
On the face of it, this suggests that operating as an unincorporated business is more tax-efficient in terms of basic rate income. However, it is important to note that limited companies have the advantage of incurring a lower rate of tax on earnings that are retained within the company, whereas unincorporated businesses always pay the highest rate of tax on any profits not drawn in the year. Ultimately a limited company provides a better vehicle for controlling how much personal income you recognise. It certainly is a more complicated decision than it used to be!
Over the coming year, this will be one of the most important areas of review. If you want to know what the best tax structure is then you will need to be able to forecast the following:
How much you need to draw from your business for lifestyle costs
How much additional draw you need as a “bonus” each year
How much profit and cash you expect your business to generate in a year
Your investment plans
Your plans for an eventual exit from the business
All these factors have a significant impact on deciding the best trading structure. Tax is very important but knowing your longer-term plans may suggest saving Income Tax today isn’t the biggest tax saving you could be making overall.
If you want to review this in more detail, then please speak to your dedicated Manager or Partner and book a review meeting.
Research & Development Relief
Research and Development (R&D) was included as part of the Chancellor’s spending commitments. He announced that the definitions for Limited Companies claiming the relief will be expanded to specifically include cloud computing and data costs for projects.
Legislation will also be brought in to restrict allowable expenditure to ensure that it is UK based businesses that benefit from the relief.
This means that we are expecting our R&D team to remain busy over the coming year. If your company is undertaking a project to developing something new and innovative that you could not simply buy from a supplier then you may have a claim to be made.
Speak to your Manager or Partner if you have questions on this and together with our associated advisors we can help assess your project against HMRC’s criteria to see what might be possible. Remember, R&D projects do not have to be something you sell. Many projects we have successfully claimed for have focused on innovation in internal technology and efficiencies.
It was announced that businesses in the retail, hospitality and leisure sectors will receive a temporary relief for Business Rates.
Applicable businesses will get 50% off their business rates bills in 2022-23. This is essentially a tapering of the reliefs given in the March 2021 budget, intended to help continue the recovery of these sectors that were hit hard by the restrictions of the last year and a half.
Capital Gains Tax
The only relatively minor change to Capital Gains Tax rules is an extension on the time to submit a Capital Gains Tax return on the sale of residential property. Since March 2020 it has been law that the sale of a UK residential property has to be declared to HMRC within 30 days of completion and payment of any Capital Gains Tax must also be made within this time frame.
In reality this has proven difficult. There was not much publicity about this and where properties have been owned for a significant period of time, getting the information together within 30 days to make the declaration has often been difficult. Effective from 27 October 2021 this deadline has been permanently extended to 60 days. This extension to the deadline appears to be an admission that the 30-day deadline was too restrictive for correct filings to be made.
There is the potential for penalties if you do not submit a Capital Gains Tax return and pay the tax within 60 days of completion of the sale of residential property. Talk to us as early as possible in the process of the sale of a property on which you think tax will be due to avoid additional stress.
There have again been no changes to Inheritance Tax after another budget surrounded by rumours and concerns. As the Office of Tax Simplification has spent a lot of time looking at these areas it is reasonable to expect some legislation will change in coming years, but it remains a guessing game as to when the government have the will or the guts to change them. These taxes are not significant earners for the treasury compared to Income Tax, Corporation Tax and VAT but they do create headlines.