We have outlined below some useful tax planning ideas to consider before the end of the 2022/23 tax year (31st March for Companies and 5th April 2023 for individuals). Many of the schemes available are on a “use it or lose it” basis so if you want to take advantage of any of these schemes, you should start to take action as soon as possible.
Considerations for Individuals
Self Invested Pension Plans (SIPPs)
Set one up
You might not be thinking about contributing to your pension, but if you have not set one up yet, you probably should.
The reason for this is that there is an annual contribution allowance, currently £40,000, and any unused contributions can be carried forward for up to three years.
However, unless you have a pension set up, you will not have any allowance. So if you have not set up a pension then you will lose the pension allowance for this year and it will not be carried forward.
Practical example: Set up a SIPP and make a £100 contribution. You will then have an unused pension allowance for the year of £39,900. This allowance will carry forward into the next tax year, where you will then have a total pensions allowance of £79,900. If you do not make any contributions this allowance will carry forward into the tax year ending 5th April 2025 and in that year you will have a total allowance of £119,900. If you wanted to, you could make a pension contribution from your limited company for this amount which will then go into your pension pot tax free. On top of this, it will reduce your company profits by the size of the contribution, which will reduce your corporate tax bill.
Consider making a delayed contribution
The corporation tax rate is currently 19%, however, this is due to increase to 25% from 1st April 2023 for companies with profits over £250,000 (and a marginal rate between 19% to 25% for companies with profits between £50,000 to £250,000). Therefore, if you do plan on making a contribution, it may make sense to delay the payment until the start of the new financial year as the amount of corporation tax reduced will likely be greater.
Each year you can contribute up to £20,000 into ISAs. There are 4 types of ISAs:
- Cash ISA
- Stocks and shares ISA
- Innovative finance ISA
- Lifetime ISA
You can have multiple ISAs, but you can only put money into one of each type of ISA in each tax year. You have to be a UK resident and aged over 18 in order to invest in an ISA.
Parents can fund a junior ISA or child trust fund with up to £9,000 per child for the 2022/23 tax year.
Any gains made within an ISA are typically tax free.
Any unused ISA allowance is not carried forward,so you should aim to use as much of your allowance as possible before 5th April 2023.
Capital Gains (CGT) Annual Exemption
Each year there is an annual allowance for tax free capital gains. Any unused allowance is not carried forward, so should be used where possible. The current annual allowance for capital gains is £12,300, which means your first £12,300 of capital gains in a year are tax free.
If you have any assets that have gone up in value, such as stocks/shares, crypto currency etc., you may want to consider selling some of them so that you can crystallise a gain of up to £12,300 that you can then take tax-free.
Important: There are rules in place to stop people from selling an asset on the 5th April, crystallising a gain and then repurchasing immediately, or within a short period, afterwards. These are known as ‘bed and breakfasting’ rules.
Therefore if you are triggering a capital gain to make use of your annual exemption, please note that you cannot repurchase an asset within 30 days of the disposal. If you repurchase the asset after 30 days then you should not fall foul of these rules.
One legal way to avoid the bed and breakfast rule is to sell an asset and then immediately make a repurchase via your SIPP or ISA. This is referred to as ‘Bed and SIPP’ or ‘Bed and ISA’
One advantage of this approach is that if you have not utilised either allowance then you can make a disposal, which generates funds to then transfer into one of those accounts, making use of your annual exemption and also using up some of either allowance.
Important: If you Bed and SIPP then not only will you not pay CGT but if you’re a 40% or 45% taxpayer, you should also benefit from income tax relief based on your SIPP contribution.
One final option to avoid the Bed and Breakfast rule is available if you are married. Transfers between spouses are considered to be done without trying a gain or loss. Therefore you can make a capital disposal, triggering a tax-free gain, and then your spouse can make a corresponding purchase. After 30 days, your spouse can then transfer the asset back to you without any gain being realised.
SEIS / EIS / VCT investments
There are various investment schemes available which offer tax benefits/incentives. However, you should proceed with caution if you want to look to make investments through these schemes and many of these are only suitable for experienced business owners and investors. The available schemes are:
- Seed Enterprise Investment Scheme (SEIS)
- Enterprise Investment Scheme (EIS)
- Venture Capital Trusts (VCTs)
A summary of the caps and tax benefits for each type of investment scheme is outlined below.
Dividends from limited companies
If you are an owner of a limited company, you may want to consider utilising the tax bands and available allowances for dividends. For 2022/23, the relevant rates and allowances are:
- Tax-free allowance: £2,000 (this is in additional to the £12,570 personal allowance)
- Dividend tax at basic rate (total income up to £50,270): 8.75%
The rate of dividend tax is lower than the applicable rate for salary income, particularly at the basic rate (income up to £50,270). At the basic rate, dividend tax is 8.75% whereas income tax on salaries is 20%. There is also no national insurance contributions due on dividend income, whereas salaries can incur both employee and employer NICs.
If you have no other income, you can effectively withdraw £52,270 of dividends from your limited company and pay less than £3,300 in tax. This represents an effective tax rate of around 6.3%. However, it is usually recommended to utilise a portion of the personal allowance as salary due to the fact that it is tax deductible for the company and also for state pension purposes.
Beyond the basic rate tax band, the rate of dividend tax increases quite dramatically. If you have income (including dividend income) between £50,270 and £150,000 then the rate of dividend tax rises to 33.75%. However, this rate (known as the ‘higher rate’) is only applicable on the amounts over the basic rate band. For income over £150,000 the dividend rate becomes 39.35% and you also start to lose your annual personal allowance. Again, this rate (known as the ‘additional rate’) is only applicable on amounts over the higher rate.
If your priority is to be tax efficient and you do not need to make significant withdrawals from your company then it is recommended to avoid creeping into the higher and additional rates. If you want to pay the minimal amount of tax possible in a given tax year then the best way is just to receive the least amount of income/dividends.
However, it can also be tax efficient to take dividends up to the top level of the basic rate band. Whilst this can result in more tax to be paid than you may have wanted, the dividend tax rate at the basic rate band is the lowest tax rate that could be applied to individuals (both income and capital gains) and therefore represents a highly tax efficient way of withdrawing profits from your company. So you may want to consider utilising more (or all) of the basic rate band via dividend distributions from your limited company - providing there are available and sufficient profits & reserves to do so.
Please note that, for the 2022/23 tax year, it is generally more tax-efficient to withdraw profits from your limited company via dividends rather than salary payments.
However, due to increases in the rates of both corporation tax and dividend tax from the 2023/24 tax year onwards, it may actually become more tax-efficient for individuals in the higher or additional rate tax bands to receive salary payments rather than dividend payments. This is partly because salary payments are allowable deductions for corporation tax, whereas dividends are paid from post-tax earnings. So an increase in corporation tax may make salary payments more desirable in order to offset against taxable profits.
Considerations for Companies
Capital Allowances (Corporation Tax)
Super Deduction Ending on 31st March 2023
The super deduction means that you get 130% tax relief on qualifying equipment purchases (compared with the typical 100%) in the year of purchase. The super deduction ends on 31st March 2023. If you are considering purchasing computer equipment or plant & machinery, you may want to consider making the purchase before 31st March 2023 so that the purchase qualifies for the 130% super deduction.
However, as the corporation tax rate is increasing from 1st April 2023, if your company is going to be in the 25% corporation tax rate, a 100% capital allowance deduction will be marginally better after 31st March 2023 as a full 25% will be reduced, whereas pre 1st April 2023, 130% of 19% corporation tax works out as a 24.7% deduction.
However, as the corporation tax rate is increasing from 1st April 2023, you will actually be marginally better off making fixed asset purchases after 31st March 2023 if your company is going to be in the 25% corporation tax rate (taxable profits greater than £250,000). This is because, although the capital allowance will only be at 100% of the cost price, you would be reducing taxable profits subject to corporation tax at 25% versus 19% for profits arising during the period up to 31 March 2023. So after 1st April 2023, you will effectively receive tax relief at 25% on a fixed asset purchase if your profits would be great than £250,000, whereas pre 1st April 2023, the effective relief for fixed asset purchases qualifying for super deduction works out at 24.7% (19% corporation tax rate, multiplied by 130% super deduction).
Corporation Tax increasing to 25%
From 1 April 2023, the main rate of corporation tax will increase from 19% to 25%, which will be applicable to companies with profits of more than £250,000.
The current rate of 19% will continue to apply to companies with profits of £50,000 or less, provided the company does not have other associate companies and/or is not part of a corporate group. For companies with profits between £50,000 and £250,000, a marginal rate will apply at somewhere between 19% to 25%, depending on how close the profits are to the lower and higher end of the range.
Companies in a corporate group and/or companies with other associated companies (in general, these will be companies under common control by the same shareholder) will see the thresholds outlined above reduced by the number of associate companies. For example, if a company has three other associated companies (bringing the total of associated companies in the group to four), the thresholds for the marginal rate of tax will become £12,500 and £62,500, as the thresholds will be one quarter of the normal thresholds as per above.
In this respect, it is worth noting that it will be the number of associated companies, rather than the cumulative profits within the associated group, which will determine the marginal rate thresholds. So if, for example, you owned two companies; one with a profit of £150,000 and the other with a profit of £50,000. This will mean the first company would be subject to corporate tax at 25%, since the upper end of the marginal rate threshold will be reduced to £125,000 due to it having an associate, and the other company would be within the marginal rate (as the lower end of the marginal threshold would be reduced to £25,000). However, if both companies were merged together as one company, total profits would be less than £250,000, which means the applicable rate of corporation tax for total profits would be within the marginal rate.
For companies with a financial year which straddles 31 March 2023, profits will be time apportioned into a period subject to the previous tax rate applicable up to 31 March 2023 and a period subject to new tax rate applicable from 1 April 2023.
This means that if, for example, you have a company with a financial year of 30 September 2023, half of the year’s profits would be subject to 25% corporation tax and half will be subject to 19% corporation tax. This is because 6 months of the year falls before 1 April 2023 and the next six months falls after 1 April 2023.
If you are a company with large profits and also high seasonality (e.g., a large portion of sales comes from the November to December period), you may want to consider shortening the year-end date so that a disproportionate amount of profits does not end up falling within the new 25% tax band. For example, if, in the example above regarding a financial year ending 30 September 2023, 75% of profits for the year arose in the period up to 31 March 2023, it would be disadvantageous to have 50% of the profits subject to 19% tax and the remaining 50% to be subject to tax at 25%. If you shortened the financial year, this would end the tax period and effectively lock in profits being subject to tax at 19%.
However, you should note that shortening a year-end to lock in profits subject to 19% tax will mean that the tax will need to be paid earlier than the normal deadline had you not shortened the financial year. So cashflow should also be considered to this respect.
For companies with a year-end between 30 September 2022 to 28 February 2023, a similar effect could be achieved by extending the financial year. Companies are allowed to extend their financial year to a maximum of 18 months, so a company with a year end of 30 September 2022 could theoretically extend its year up to 31 March 2023. However, you should note that a company is usually only allowed to extend its financial year once every 5 years, so you may want to take this into consideration. There are no restrictions on the number of times you can shorten the financial year.
Changes to Research & Development relief (R&D Tax Credits)
From 1 April 2023, the rate at which relief is given on eligible R&D costs for SMEs is reducing from an additional 130% of costs to 86%. The rate at which tax credits are paid will also reduce from 14.5% to 10%.
This means that, where possible, it would be tax beneficial for companies to bring forward any planned R&D expenditure that would be eligible for R&D relief.
There are also some further changes to R&D relief taking effect from 1 April 2023. Particularly noticeable is that subcontractor costs and externally provided workers will only be allowed within the claim if the work was undertaken in the UK, subject to some specific exemptions.
Furthermore, for companies who have not submitted a R&D claim before, you will be required to notify HMRC of your intention to make a claim within six months from the end of the accounting period. Previously, the time limit was two years from the end of the accounting period. If you have made a R&D claim in one of your three previous accounting periods then you are not required to notify HMRC.
Child benefits - avoiding the clawback
Child benefit starts to be clawed back where your adjusted net income, or the adjusted net income of your partner, exceeds £50,000. Adjusted net income can be higher than actual taxable income if, for example, you have taxable benefits such as a company car. However, adjusted net income can also be reduced down through pension contributions - either into an occupational (workplace) pension scheme or a personal pension.
The rate at which the benefit is clawed back is 1% for every £100 of income over £50,000. This means that 100% of the benefit will be clawed back if you or your partner has taxable income over £60,000. The clawback is in the form of an additional tax charge on the higher income partner.
You may want to consider the child benefit clawback when considering the level of dividends that you pay from your limited company. If you or your partner has taxable income over £50,000 then you may also want to consider making a pension contribution in order to reduce adjusted net income to below the clawback threshold.
Inheritance tax - gifts
When you die, the value of your estate that is above the IHT nil rate band (£325,000) will usually be subject to 40% inheritance tax. It may sound daunting, but you may want to consider ways to reduce the value of your estate that is above the nil rate band during your lifetime.
Your spouse or civil partner can inherit your estate tax-free. However, making gifts of assets to family members (or other individuals) during your lifetime can be a tax efficient way to reduce your estate value and future IHT liabilities. If you make a gift then it will be exempt from IHT as long as you survive a further seven years from when the gift was made. If you die within 7 years then IHT may apply to the gift at a tapered rate, depending on the number of years between when the gift was made and death (i.e., the rate of IHT reduces for each year of survival from when the gift was made).
If you do make a gift that is for IHT purposes, it is important to keep a record of the details (what you gave, who you gave it to, when you gave it and how much it was worth).
You can also give away up to £3,000 worth of gifts a year without it being added to your estate for IHT purposes (known as the ‘gift allowance’). On top of this, you can make gifts up to £250 to as many individuals as you like in a year, as long as the recipient wasn’t the beneficiary of gifts made with the gift allowance. You can also make a wedding gift to a child (up to £5,000), a grandchild (up to £2,500) or another relative or friend (up to £1,000).