In readiness for the new tax year starting in April 2023, Chancellor Jeremy Hunt delivered the government’s Spring Budget announcement. We explain what the changes mean for employees and employers, and self-employed business owners, sole traders, directors, and limited companies.

Changes to Corporation Tax

The planned update to the rate of business tax paid by limited companies will go ahead, taking effect from 1st April 2023. The changes mean that companies will pay Corporation Tax based on their reported profits:

• Companies with profits up to £50,000 will continue to pay Corporation Tax at 19%
• The rate increases to 25% for companies reporting profits over £250,000
• Marginal relief will provide a gradual tax rate increase for those falling between the two

R&D changes

R&D tax credits give tax relief to businesses on the cost of their research and development expenses. There are two versions of the scheme, both of which will be updated from April 2023:

• Research and Development Expenditure Credit (RDEC) scheme: Aimed at larger businesses, the rate of tax relief available will increase from 13% to 20%
• SME scheme: The enhancement that smaller business can claim will reduce from 130% to 86%. However, eligible loss-making research-intensive businesses spending more than 40% of their total expenditure on R&D could claim £27 for every £100 they spend on R&D

Changes to Capital Allowances

Capital Allowances are a type of tax relief that companies can claim against the cost of investing in long-term business assets.

There are already different types of Capital Allowances available, but with the heroically named super-deduction due to end in March 2023, the government have announced new measures to replace it.

• Full Expensing (FE): This means that between 1st April 2023 and 31st March 2026 businesses can deduct 100% of the cost of some main-rate plant and machinery from their profits before tax.
• 50% first-year allowance for special rate assets:(FYA) Taxpayers can deduct 50% of the cost of assets that would normally fall into the special rate pool. This scheme was originally introduced alongside the super-deduction, but the government are now extending it until 31st March 2026.

Updates to free childcare

In the hope of helping some parents with costs, the Chancellor announced new measures for free childcare in England. Equivalent funding is expected to be announced for Wales, Scotland and Northern Ireland.

Under the current rules, children aged three and four are eligible for 30 hours of free childcare each week, and this will now be extended to include children over the age of 9 months, with effect from April 2024.

Energy prices

The cap on household energy bills was due to increase in April 2023, but the Energy Price Guarantee has now been extended at the current level until the end of June 2023, limiting the bill for a typical household to £2,500. It might offer some protection if you run your business from home, but remember you can only claim tax relief on the portion of your bills relating to the business.

For eligible businesses and other non-domestic users the Energy Bills Discount Scheme will replace the Energy Bill Relief Scheme. It offers support for high energy bills until 31 March 2024, and for those businesses operating in sectors which require high levels of energy use in particular.

Private pensions

Without a workplace pension to pay into, lots of self-employed people rely on private pensions to help them prepare for the future. It can be a tax-efficient way to save, with the Government offering tax relief on private pension contributions.

• The amount you can save into your pension pot in a tax year before starting to pay tax is currently £40,000. Known as the annual tax-free pension allowance, the threshold will increase to £60,000 from April 2023.
• Under current rules you’ll also normally pay tax if your pension pot goes above the lifetime allowance of £1,073,100. The Spring Budget removes this charge, with plans to abolish it completely in a future Finance Bill.

Other changes coming into effect from April 2023

Though they didn’t get top billing in the Chancellor’s Spring Budget, other updates announced in the Autumn Statement 2022 are also rolling out from April 2023.

Changes to the National Living Wage and National Minimum Wage from April 2023

Employers must pay the National Living Wage to any employees aged 23 or older, and not in the first year of an apprenticeship.

• National Living Wage will increase from £9.50 to £10.42 starting from 1st April 2023.

The National Minimum Wage (NMW) applies to younger employees, and sets out the minimum amounts that employers must pay them depending on their age. These amounts will also increase from April 2023.
 

Income Tax from April 2023

The upcoming changes to income tax rates and thresholds include a lower threshold for starting to pay the additional rate.

The additional rate of income tax

The point at which taxpayers start paying the 45% additional rate on income will reduce from £150,000 to £125,140 as of April 2023. It means that high earners will pay the additional rate on more of their earnings.

Basic rate tax

A planned reduction to the basic rate of income tax will no longer go ahead. Originally expected to take effect from April 2023, the income tax basic rate will remain at 20% for the foreseeable future.

The personal tax allowance and tax thresholds frozen

An increase to income tax thresholds and the personal tax allowance is normally welcome, because the point at which you start paying tax goes up – hopefully matching rising wages in line with inflation. When the tax thresholds are frozen but pay goes up, it means you’ll eventually pay tax on more of your earnings.

National Insurance frozen

The thresholds for National Insurance are also frozen until April 2028, including the threshold for making National Insurance contributions as an employer, although the £5,000 Employment Allowance remains available. If you’re the director of a limited company, these changes might affect the level of salary you take from your business in order to be tax efficient.

Dividend tax rates and allowances

The dividend allowance is the total amount you can receive from dividends in a tax year before starting to pay tax on them.

• From April 2023 the dividend allowance is £1,000, which then reduces again to £500 from April 2024
• The 1.25 percentage points increase to the dividend tax rate which took effect from April 2022 will stay in place
• The additional rate threshold is reducing from £150,000 to £125,140, and this has an effect on when you start paying the additional rate of dividend tax (which is 39.35%)

Business rates

Business rates are a type of tax charged on non-domestic properties, such as shops and offices. To help businesses affected by new property valuations impacting rates, the Government announced in late 2022 that they are introducing a new £13.6 billion support package. The government’s business rates factsheet explains the measures in more detail, or ask your accountant for help with anything you’re unsure of.

Capital Gains Tax

Normally only individuals pay Capital Gains Tax (CGT), but this does mean it also applies where a business isn’t legally distinct from its owner, such as a sole trader or partnership.

 
You’ll pay Capital Gains Tax on gains that you make above the tax-free allowance. Also known as the Annual Exempt Amount, the thresholds will change in the new tax year:

• The allowance reduces to £6,000 for the 2023/24 tax year
• It reduces again to £3,000 for the 2024/25 tax year

 
Our Cost of Living Survival Guide for Businesses includes more tips for dealing with the changes, or learn more about how our online accounting services can support you. Call 020 3355 4047 to chat to the team, or get an instant online quote.