Self-Employed Tax
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Are you ready for tax year end?
- 17 Jan 2023
This tax year, ending on 5 April 2023 has been far from normal. We have had several mid-year changes in NIC rate, and other changes, indeed a whole ‘mini-Budget’ announced and then mostly reversed. But as we approach a new fiscal period, it’s time to consider which evergreen pieces of tax year-end advice should still be followed, and if approaching changes will require us to take action now.
Last year’s tax year end article covers the basics. For a contractor running through a PSC, there is normally a level of choice around when to take dividends. In this situation, the principle of thinking about your income in ‘pots’ and filling those pots to ensure maximum tax efficiency is the primary objective. You need some level of awareness of what your income in this and the next tax year is likely to be, to do this properly.
For example, if you’ve not filled your ‘tax free’ dividend allowance pot (currently £2k) and you have distributable reserves (undrawn profits), then you should. If you are likely to at least draw dividends to fill the basic rate band next year, then you should make sure you have filled this years’ pot to minimise your ongoing tax bill. As ever, be aware on a personal level of unused ISA allowances, investment reliefs and IHT-type gifts as well – all of which normally have annual allowances which lapse if not used.
Another principle some think is important is ‘tax delayed is tax saved’, i.e. if you can postpone a tax bill to the following tax year, that is often seen as A Good Thing. However, where pots of income are involved and allowances that expire to be considered, this is less relevant – filling the pots you need to live should probably take precedence (always get advice tailored to your specific circumstances, of course).
But as we approach this new tax year, the dynamics are quite different overall to recent years. The bands and allowances for the next tax year are broadly frozen or reduced, and so in real terms, given inflation, the bands and allowances are shrinking, despite the rates of tax mainly staying the same. This for most will given even more of an impetus to use the bands you can now. For example, next year’s ‘free’ dividend band halves to £1k from £2k (and will halve again the following year). When you also consider that the basic rate band will be the same next year, but worth less after considering the value of money, this makes proper use of the ‘pots’ available essential planning.
The income tax rate above £125,140 is currently 40% - but next year will be 45%, the threshold for additional rate tax coming down from £150k. If you have the ability to adjust the timing of your taxable income (unusual but possible) you could consider taking steps to ensure the income is realised this year rather than next if it is likely to fall into this band in whichever year it occurs. Other than this change, after many planned amendments, the main rates of income tax, dividend tax, and national insurance are all staying the same.
Capital gains tax rates are stable but the tax-free capital gains allowance is reducing next year, from £12,300 to £6k, and then £3k the following year. You may have options over when to realise a taxable gain, such as from listed investments, or a disposal of shares in a company you own. In simple terms again, the principle is to fill up tax free or lower tax bands if you can.
For example, if you have a tradable shareholding whose value incudes a significant gain, it may be sensible to sell some or all of it to fill your CGT nil rate band and buying back similar shares, incurring no tax bill but allowing you to fix a new, higher base price for the new shares and reducing your potential tax bill in the future. You may have a variety of assets in such a position, but do take personalised advice from a tax advisor or financial advisor as appropriate before taking action, as there may be other factors outside tax to consider first.
The other major tax change which happens almost at the same time as the personal tax year renews is that from 1 April 2023, the rate of corporation tax (CT) is changing for many people. In simple terms, a single limited company’s overall level of CT rate will increase when profits pass £50k, making the overall rate increase from 19% to 25% as the profits reach £250k. In general terms (but do take tailored advice), the thresholds are cut where more than one company is controlled by the same people or group of people. The actual impact of this is that between the lower and upper thresholds the rate of CT experienced is 26.5%. This will mean that where possible, managing profits will become a factor for some.
This will mean that if you have the choice about whether to complete a profitable piece of work before or after 1 April this year, and your overall profit levels support it, you may be well advised to get it done now. If your year-end doesn’t fall on the 31 March you may need to take other steps to ensure the ‘excess’ profit lands in the correct period. Other measures to consider for the future are looking again at company pension contributions, and if you own more than one company, reviewing the rationale for that, as it may now increase your corporate tax bill.
Finally for those trading through a company, a reminder that the super-deduction rate of 130% for new plant and machinery ends on 31 March 2023. If you are planning to make an asset purchase in the near future, looking at whether it’s possible to legally commit to it before the deadline expires and the rate reduces will be worthwhile.
Reviewing your position regularly and in advance of deadlines remains the best ongoing strategy for tax management. This year, after much confusion, with changes announced and then cancelled, we find rates and bands virtually unchanged – but action may still be required.
This blog is just one of many resources IPSE provides for those seeking guidance and support on tax as a self-employed person.
To find it all in one place, visit our Self-Employed Tax advice page.
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