2023 Tax Year End Planning

Tax changes effective this April 2023...

With important tax changes taking place this April, see what action you might take:

Frozen Allowances

Inflation is a gift for the Chancellor when so many tax allowances have been reduced or frozen. As wages increase with inflation, more and more people will get caught by a 40%, 60% or 45% tax rate and many will have to repay child benefit when they didn’t before. 

In this environment, the real tax cost of earnings and profits will increase as time goes on. For example, if you’re planning to refurbish your buy-to-let you might save more real income tax by delaying the refurbishment.

Pensions

With corporation tax increasing from 19% to 25%/26.5% many company owners may wish to delay some pension contributions to after April 2023, subject to using the £40k annual allowance effectively.

High earners should always check they’re keeping taxable earnings under £100k wherever possible which might be achieved by paying more into your pension scheme before the end of the relevant tax year.

If you’re likely to become an additional 45% taxpayer from April 2023 for the first time because your income is between £125k and £150k, you’ll save an extra 25% instead of 20% by making pension contributions after April 2023.

Spouse Dividends

Since 6 April 2022, dividend tax has been at its highest level. If you can take more dividends from your company you might consider asking your spouse to take on some shareholder responsibilities and  receive some dividends, particularly before 5 April 2023 while the £2k 0% tax band remains available.

From 6 April 2023, the £2k is halved to £1k so this advantage reduces, however, spreading the tax costs across lower tax bands is likely to remain advantageous.

National Insurance – State Pension Top Up

From 6 April 2023 the ability to make top up payments for earlier years is significantly reduced.

Currently many people can make catch up Class 3 NI payments all the way back to 6 April 2006 to fill any gaps in your state pension qualifying years. From this April this is being reduced to 6 years, which is still valuable and will be sufficient for many people.

If you’re not sure, you need to check your Personal Tax Account, which despite its name also shows your state pension.

Research & Development

One major change from this April is the reduced cash credit for tax loss-making SMEs. The effective value is currently 33.35% but this is being reduced by nearly a half to 18.6%. (The government is punishing SMEs for the poor practices of non-qualified companies set up to claim cash backs.) You may therefore wish to check whether some costs can be brought forward to access the current higher cashback rate.

On the other hand, if you’re profitable with over £50k profits your marginal tax rate will be increasing by at least an absolute 6%. The combination of this rate increase and the reduced credit from 230% to 186% is a net value increase from 43.7% to 46.5% for R&D spend from April 2023.

The increase in the value of a tax credit under the alternative RDEC scheme is a net tax credit of 15%, still lower than the percentages above, meaning it may remain less appropriate for many SMEs. 

If a major part of your claim is overseas contractors, these will no longer be eligible and you may wish to bring some of those forward if possible. However, if you’re looking forward to claiming data and cloud hosting as an R&D cost, these become eligible from April and a delay might work out depending on the project plans.

The requirement to provide more details is already fulfilled when On The Spot Accountants make claims. If the advance notice of a claim ends up in the final legislation we’ll be keeping in touch with you to ensure a notification is submitted even if it’s a protective one. Happily, most client tax returns are easily submitted within the 6 month required timeframe which may supersede the need for any advance notification at all!

Super Deduction 130%

As this ends on 31 March 2023, bringing forward a large capital spend might be worthwhile saving an effective 24.7% of corporation tax. However, as this was only a way to mimic the 25% increased corporation tax rate from 1 April 2023 and has certain restrictions, if you have profits over £50k, capital spend is likely to save you more, 25%/26.5%, corporation tax by waiting until 1 April 2023.

Capital Gains Tax

If you’re about to exchange on an asset, you may want to ensure this definitely happens before 5 April 2023, after which your tax free annual exemption of £12,300 is reduced by more than half to £6,000. For a couple selling a buy-to-let property this might cost tax of up to £3,528 for the sake of a few days.

Likely, more valuable, is the increase in corporation tax for companies who might save 6% on the whole gain by exchanging before 1 April 2023 and if your year end isn’t 31 March, it might be worth changing it!

You’ll see there are some twists and turns with these changes, sometimes bringing forward plans is the better answer, sometimes delaying plans is better. Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions. In particular, some changes have slightly different effects if your year end is not 31 March.