How to reduce the impact of the April 2023 tax increases

The Chancellor announced a raft of tax changes from April 2023 and these changes will affect business owners, self-employed, contractors and individuals alike.

April 2023 sees several tax changes that people need to be aware of. These changes include amendments in Corporation tax rates, the tax-free dividend allowance, Capital gains tax free allowance amendments and R&D tax relief changes from April 2023.

In this blog, we'll cover the main changes for tax year 2023/24 and how to get your personal tax planning and corporate tax planning in order.

Corporation Tax

One of the biggest changes in April 2023 is the Corporation Tax increase from 1 April 2023. For companies with profits of less than £50,000, the rate remains at 19%. For businesses whose taxable profits exceed £250,000, the rate will increase to 25%. For companies in between there will be a sliding scale of rates.

Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate, but this will be reduced by a marginal relief meaning CT rates of between 19% and 25%.

Income tax rises set to hit thousands of households - how to reduce impact of April increases

With advice and careful tax planning, it is possible to mitigate the impact of some of the April tax changes and reduce the tax paid, whether you are a basic rate taxpayer or a higher rate taxpayer.

Increased income tax for higher earners

If you are a higher rate taxpayer, you will be hit with the income tax additional rate threshold (ART) reducing from £150,000 to £125,140 from 6th April 2023. Changes to this additional top rate tax band, means that more taxpayers will pay income tax at the higher rate of 45% once their income goes above £125,140. The new threshold will apply to higher earners in England, Wales, and Northern Ireland.

Basic rate taxpayers are also affected because the income tax personal allowance of £12,570 is frozen until 2028.

Ways to reduce your income tax bill

If you run a limited company there are ways to reduce income tax by paying yourself a mix of salary and dividends.

If you run a limited company and as the Government freeze the income tax thresholds and make changes around National Insurance (NI) then you need to reconsider the split between salary and dividends each year, so you are taking the most tax efficient salary and dividends combination for the tax year.

Dividends are taxed at different rates to your salary and there is are separate dividend tax allowances and thresholds. These are significantly lower than standard rates of income tax on salary. You are allowed to earn a certain amount of tax-free dividend income; this is your dividend allowance.

Dividends are also not subject to NI, so they can be very tax efficient. The tax you pay on dividends will vary depending on how much you pay yourself in dividends during a tax year.

Dividend tax-free allowance

The Chancellor has cut the dividend allowance to £1,000 from 6 April 2023 and reducing it further to £500 from 6 April 2024.

Additionally, from April 2023, the rates of taxation on dividend income will remain as follows:

• the dividend tax ordinary rate - 8.75%
• the dividend tax upper rate - 33.75%
• the dividend tax additional rate - 39.35%.

Contribute to your pension

Paying pension contributions is a tax-efficient way to extract profits from your limited company. By paying pension contributions directly from your limited company, you’ll reduce your company’s taxable profits and therefore your Corporation Tax liability. Making the contribution through your limited company is usually more tax-efficient than making the contribution from your own personal funds.

State pension

The reinstatement of the triple lock for state pensions comes into effect from 6 April 2023. It means that the State Pension will rise in line with September’s inflation rate of 10.1%. This is the biggest ever increase to the State Pension. This was announced in last year's Autumn Statement.

Your State Pension age is the earliest age you can start receiving State Pension. You can check your State Pension age on the UK Government’s website.

State Pension age rose to 66 last year, but it’s regularly reviewed to consider things like affordability and life expectancy. It’s currently being reviewed and is predicted to rise to 68 soon.

The National Living Wage (NLW) and National Minimum Wage (NMW)

The government will increase both the NLW and NMW from April 2023 as follows:

• Employees aged 23 and over: £10.42 per hour.
• Employees aged 21 – 22: £10.18 per hour.
• Employees aged 18 – 20: £7.49 per hour.
• Employees aged 16 – 17: £5.28 per hour.
• Apprentices: £5.28 per hour.

Inheritance tax threshold

The Inheritance Tax (IHT) nil-rate band of £325,000 will be frozen until April 2028. In addition, the residence nil-rate band will also be frozen at £175,000. The residence nil-rate band taper will be frozen at £2 million.

National Insurance primary threshold frozen

The NIC primary threshold for employees and the Class 2 Lower Profits Threshold for the self-employed will both be frozen until April 2028.

Capital Gains Tax

The capital gains tax annual exemption will fall to £6,000 for disposals on or after 6 April 2023 and further reduce the exemption to £3,000 for disposals on or after 6 April 2024. It may be worth trying to make disposals before the end of the 22/23 tax year.

Research and Development

The Research and Development expenditure Credit (RDEC) rate will increase from 13% to 20% for businesses undertaking Research and Development (R&D) expenditure after April 1, 2023, however the small and medium-sized companies (SME) extra deduction will reduce from 130% to 86% and the SME credit rate would decrease from 14.5% to 10%.

VAT registration threshold

The VAT registration and deregistration thresholds will also be frozen at £85,000 and £83,000, respectively for a further period of two years from 1st April 2024.

Rising house prices has meant you'll be paying more stamp duty land duty (SDLT)

House prices have been rising, so this will impact the stamp duty you pay. Some relief for people looking to buy a house is that at the beginning of 2023, house prices have been falling or remaining stable.

The SDLT cut announced by the government on 23 September 2022 will remain in place until 31 March 2025 to support the housing market.

This measure temporarily increases the amount that a purchaser can pay for residential property before they become liable to Stamp Duty Land Tax (SDLT), while maintaining the higher rate of 3% on additional dwellings. It increases the residential nil-rate tax threshold from £125,000 to £250,000.

The nil-rate threshold for First Time Buyers’ Relief is also temporarily increased from £300,000 to £425,000 and the maximum property value that is eligible for First Time Buyers’ Relief is increased to £625,000.

The measure means that all purchasers of residential property bought between 23 September 2022 and 31 March 2025 will pay less or no SDLT.

Summary

With tax legislation constantly changing, it can be difficult for individuals and businesses to navigate the complexities of the UK tax regime. Without the right advice, you may end up with a bigger tax bill than you need to.

Working with an accountant like dns accountants can help to minimise your personal and corporate tax bills. dns tax experts can explain how the new changes will affect your tax liabilities and tax bill directly. Our experts can create you a personalise tax plan, submit your tax returns and calculate the tax you need to pay.

To get a bespoke tax planning advice contact us today, call us on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.