The much anticipated first Budget under the Sunak administration was delivered by Jeremy Hunt on 15th March. There was much that had already been announced but there were also some surprises; particularly for Pensions and R&D.
Capital Allowances: the government is introducing full expensing for some capital investments. Companies incurring qualifying expenditure on the provision of new plant and machinery on or after 1 April 2023 but before 1 April 2026 will be able to claim new temporary first-year allowances. These allowances are: 100% first-year allowance for main rate expenditure – known as full expensing; and a 50% first-year allowance for special rate expenditure. Both these allowances are on top of the permanent £1m Annual Investment Allowance which is available to all businesses, including unincorporated businesses and most partnerships.
During this 3 year period, companies across the UK will be able to write off the full cost of qualifying plant and machinery investment in the year they invest. With the super-deduction coming to an end on 31 March 2023, FE lets taxpayers deduct 100% of the cost of certain plant and machinery from their profits before tax. It is effective from 1 April 2023 to 31 March 2026.
It applies to spending on main rate equipment, which includes but is not limited to, warehousing equipment such as forklift trucks, tools such as ladders and drills, construction equipment such as bulldozers and excavators, machines such as computers and printers, vehicles such as tractors, lorries and vans, office equipment such as chairs and desks, and some fixtures such as kitchen and bathroom fittings and fire alarm systems. FE means that companies can deduct 100% of the cost from their profits straight away – rather than more slowly over the life of the asset. Similar to the super-deduction, FE also results in a 25p tax saving for every £1 invested (19% x 130% superdeduction rate= 25%).
Research & Development: For expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20% but the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86% and the SME credit rate will decrease from 14.5% to 10%.
A higher rate of SME payable credit of 14.5% will apply to loss-making SMEs which are R&D intensive. To be R&D intensive the ratio of the company’s qualifying R&D expenditure must be 40% or above of the company’s ‘total expenditure’ for the period. This equates to a receipt of £27 for every £100 of R&D expenditure.
Employee Share Options: changes are announced to the Enterprise Management Incentives (EMI) scheme from April 2023 to simplify the process to grant options and reduce the administrative burden on participating companies. This includes, from 6 April 2023, removing requirements to sign a working time declaration and setting out details of share restrictions in option agreements.
Reform of the Company Share Option Plan (CSOP) makes changes to this tax-advantaged employee share scheme available to all UK companies and their employees as follows:
The employee share options limit will be doubled from £30,000 to £60,000.
The ‘worth having’ condition, which limits which types of shares are eligible for inclusion within a CSOP scheme, will be removed.
These changes will have effect for share options granted under CSOP schemes on or after 6 April 2023. Existing options granted before 6 April 2023 will also benefit from these changes.
Corporation Tax: as expected the rate of Corporation Tax will rise to 25% from 19% with effect from 1st April 2023. Companies with financial years straddling this date will have a split year apportionment between 19% and 25% for this year. Companies with profits up to £50,000 will remain at the 19% rate while those with profits between £50,000 and £250,000 will pay 25% less a marginal relief rate to create a sliding scale. The marginal relief fraction is 3/200. Those with profits over £250,000 will pay the full 25% rate.
However, limits may be even lower for some as they need to be:
- reduced proportionately if an accounting period is less than 12 months, and
- divided by the total number of associated companies.
For example, a company with three associated companies will have a lower limit of only £12,500 (£50,000 divided by four) and an upper limit of £62,500 (£250,000 divided by four).
Two companies will be associated if:
- one has control of the other, or
- the same person, or persons, have control of both of them.
It does not matter where the companies in question are resident, or if they were only associated for part of the accounting period. You can however ignore dormant companies and “passive” holding companies where dividends pass straight through to the shareholders.
Control here has the same meaning as for close companies – the ability to control directly or indirectly a company’s affairs through share capital, voting power or any other rights to income and assets. HMRC’s guidance at CTM60210 is worth consulting for more on this.
VAT: The VAT registration and deregistration thresholds will not change for a further period of two years from 1 April 2024, staying at £85,000 and £83,000 respectively.
Pensions: This measure supports the government’s efforts to encourage inactive individuals to return to work, in particular those aged 50 and above, and it removes incentives to reduce hours or leave the labour market due to pension tax limits. Legislation will be introduced in Spring Finance Bill 2023 and will have effect from 6 April 2023. This will:
- Increase the Annual Allowance from £40,000 to £60,000.
- Increase the Money Purchase Annual Allowance from £4,000 to £10,000.
- Increase the income level for the tapered Annual Allowance from £240,000 to £260,000.
- Ensure that nobody will face a Lifetime Allowance charge.
- Limit the maximum an individual can claim as a Pension Commencement Lump Sum to 25% of the current Lifetime Allowance (£268,275), except where previous protections apply.
- Change the taxation of the Lifetime Allowance excess lump sum, serious ill-health lump sum, defined benefits lump sum death benefit and uncrystallised funds lump sum death benefit, where they are currently subject to a 55% tax charge above the Lifetime Allowance, to taxation at an individual’s marginal rate.
Legislation will be introduced in a future Finance Bill to remove the Lifetime Allowance from pensions tax legislation.
Tax and NIC: all personal tax and NIC bandwidths and allowances remain frozen at their current rates until 2028. The income tax personal allowance was already fixed at the current level until April 2026 and will now be maintained for an additional two years until April 2028 at £12,570.
The government will uprate the married couple’s allowance and blind person’s allowance by inflation for 2023/24.
There is a reduction in the personal allowance for those with ‘adjusted net income’ over £100,000. The reduction is £1 for every £2 of income above £100,000. So there is no personal allowance where adjusted net income exceeds £125,140.
The basic rate of tax is 20%. In 2023/24 the band of income taxable at this rate is £37,700 so that the threshold at which the 40% band applies is £50,270 for those who are entitled to the full personal allowance.
Once again, the basic rate band is frozen at £37,700 up until April 2028. The National Insurance contributions upper earnings limit and upper profits limit will remain aligned to the higher rate threshold at £50,270 for these years.
From 6 April 2023, the point at which individuals pay the additional rate will be lowered from £150,000 to £125,140.
The additional rate for non-savings and non-dividend income will apply to taxpayers in England, Wales, and Northern Ireland. The additional rate for savings and dividend income will apply to the whole of the UK.
Dividends: currently, the first £2,000 of dividends is chargeable to tax at 0% (the Dividend Allowance). This will be reduced to £1,000 for 2023/24 and £500 for 2024/25.
These changes will apply to the whole of the UK.
Dividends received above the allowance are taxed at the following rates for 2023/24:
- 8.75% for basic rate taxpayers
- 33.75% for higher rate taxpayers
- 39.35% for additional rate taxpayers.
As corporation tax due on directors’ overdrawn loan accounts is paid at the dividend upper rate, this will also remain at 33.75%.
Dividends within the allowance still count towards an individual’s basic or higher rate band and so may affect the rate of tax paid on dividends above the Dividend Allowance. To determine which tax band dividends fall into, dividends are treated as the last type of income to be taxed.
Capital Gains Tax: no changes to the current rates of CGT have been announced. This means that the rate remains at 10%, to the extent that any income tax basic rate band is available, and 20% thereafter. Higher rates of 18% and 28% apply for certain gains, mainly chargeable gains on residential properties, with the exception of any element that qualifies for Private Residence Relief.
There is still potential to qualify for a 10% rate, regardless of any available income tax basic rate band, up to a lifetime limit for each individual. This is where specific types of disposals qualify for:
- Business Asset Disposal Relief (BADR). This is targeted at directors and employees who own at least 5% of the ordinary share capital in the company, provided other minimum criteria are also met. It can also apply to owners of unincorporated businesses.
- Investors’ Relief. The main beneficiaries of this relief are investors in unquoted trading companies who have newly-subscribed shares but are not employees.
Current lifetime limits are £1 million for BADR and £10 million for Investors’ Relief.
The government has announced that the capital gains tax annual exempt amount will be reduced from £12,300 to £6,000 from 6 April 2023 and to £3,000 from 6 April 2024.
Seed Enterprise Investment Scheme: from April 2023, companies will be able to raise up to £250,000 of Seed Enterprise Investment Scheme (SEIS) investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from two to three years. To support these increases, the annual investor limit will be doubled to £200,000.
Inheritance Tax: The nil rate band has been frozen at £325,000 since 2009 and this will now continue up to 5 April 2028. An additional nil rate band, called the ‘residence nil rate band’ (RNRB) is also frozen at the current £175,000 level until 5 April 2028. A taper reduces the amount of the RNRB by £1 for every £2 that the ‘net’ value of the death estate is more than £2 million. Net value is after deducting permitted liabilities but before exemptions and reliefs. This taper will also be maintained at the current level.
"No-one could be blamed for struggling to keep up with so many tax and NIC changes impacting such a broad variety of day-to-day tax planning in one year. Employers and small business owners will need to be very well advised to be fully aware of all the different changes coming through in order to prepare and plan for them effectively. As ever, we are keeping our clients informed and are very happy to discuss any concerns or questions they might have. If you would like to have a discussion about your tax situation please call 01727 730550 to book a consultation."