Over the last few months there have been multiple changes related to various taxes, with reversals and revisions that have made it difficult for many businesses to understand how their tax obligations will change, and what that means for the new tax period from April.
In this article, we run through each of the major reforms to ensure you have up to date information to help with budgeting, tax planning and decision-making.
Capital Gains Tax Allowances
Capital gains tax is charged at between 10% and 28% against the profits made from asset disposals, including property, machinery, shares, land, and registered trademarks.
From April, the tax-free dividend allowance is reducing from £12,300 to £6,000; any gains over and above the new lower threshold will be taxable. The allowance will fall further to £3,000 in April 2024, which may mean that planned asset sales will be brought forward to the current 2022-23 tax year to avoid the higher tax exposure.
Standard rates are as below, depending on the relevant tax band:
Basic rate taxpayer CGT on property sales: 18%
Basic rate taxpayer CGT on other asset sales: 10%
Higher rate taxpayer CGT on property sales: 28%
Higher rate taxpayer CGT on other asset sales: 20%
Businesses are liable for capital gains tax alongside individuals if they trade as self-employed, partnership or sole trader organisations. Limited companies pay tax differently, as the profits made on asset disposals are accounted for in their corporation tax returns.
Changes to Dividend Allowances
Most businesses pay shareholders dividends, a share of the net profits available, less any profit retained within the company as reinvestment. Smaller organisations tend to have directors who are also owners.
They split pay into salaries and dividends, with a different optimal balance each tax year depending on the personal allowance for income tax, National Insurance thresholds, and dividend allowances.
In the next tax year, that split will change, as dividend allowances – the tax-free amount you can earn via dividend payments – is dropping from £2,000 to £1,000. This allowance will also fall again from April 2024 to £500.
Tax rates on dividend income are unchanged, but the proportion of director’s pay you choose to make through dividends may adjust to allow for tax efficiencies.
Dividend tax rates are as follows:
Basic rate taxpayers: 8.75%
Higher rate taxpayers: 33.75%
Additional rate taxpayers: 39.35%
Note that these tax rates include the 1.25% added when the Health and Social Care Levy was announced. Although the levy has since been removed, dividend tax rates have retained the extra percentage charge.
Corporation Tax Updates
The standard corporation tax rate will climb from 19% to 25% in April, although this will not affect all businesses. Those earning £250,000 or more in profit will pay the full higher rate, but smaller businesses receive tapered relief.
Companies that declare profits of £50,000 or less will stay on the current 19% corporation tax rate, with marginal relief calculated for businesses that earn between the two thresholds.
For example, if a business makes £80,000 in profit, it will likely pay £17,450 based on the proportion of its profits that exceed the lower rate cap, an effective rate of 21.8%.
Corporation taxes will also be adjusted to account for shorter accounting periods.
Income Tax Bands
We have covered the adjustments to income tax bands in previous articles, but to summarise, the additional rate band, with an income tax rate of 45%, will now apply to earnings of £125,140 and above, reduced from the current £150,000 threshold.
Other thresholds and personal allowances have been frozen until 2028, meaning more people will tip into higher tax bands over the next five years.
You can review more detail about the changes to income tax and National Insurance in our Autumn Budget Update.
With so many changes occurring simultaneously, we appreciate that businesses may be concerned about how their overall tax obligations will differ in the upcoming tax year, with possible adjustments required to dividend payments, pay structures and asset sales strategies.
Please get in touch with SAS Accounting at any time if you would like to discuss what these changes mean for your business and ensure you are prepared in good time before the new tax year begins.
