The Changes to Taxation in the Spring Budget Statement 2023: What You Need to Know
The government of the United Kingdom is preparing for the new tax year that will start in April 2023, and Chancellor Jeremy Hunt recently made an announcement in the form of the Spring Budget. The announcement includes important changes to tax laws and regulations that will affect various groups of people. Including employees, employers, self-employed business owners, sole traders, directors, and limited companies.
These changes may have significant impacts on how these groups of people operate and manage their finances. For example, new tax rates and thresholds may affect the amount of income tax paid by individuals and businesses. While changes to national insurance contributions could impact both employers and employees. Additionally, there may be changes to tax credits, allowances, and deductions that affect how much people can claim and how they can reduce their tax liabilities.
Changes to Corporation Tax
The UK government announced changes to Corporation Tax in the Spring Budget, which will take effect from April 1, 2023. The planned changes will affect the rate of business tax paid by limited companies. These companies will pay Corporation Tax based on their reported profits.
1-Companies with profits up to £50,000 will continue to pay Corporation Tax at the current rate of 19%. However, for companies that report profits over £250,000, the rate of Corporation Tax will increase to 25%.
2-The government has also introduced a marginal relief system that will provide a gradual tax rate increase for companies that fall between the two thresholds. This means that companies that report profits that are slightly above the £50,000 threshold will see a gradual increase in their Corporation Tax rate until they reach the £250,000 threshold.
The Spring Budget 2023 announced updates to the Research and Development (R&D) tax credit scheme, which provides tax relief to businesses for their research and development expenses. There are two versions of the scheme, both of which will be updated from April 2023.
Firstly, the Research and Development Expenditure Credit (RDEC) scheme, which is aimed at larger businesses, will see an increase in the rate of tax relief available from 13% to 20%. This means that businesses can claim more relief on their R&D expenses, reducing their overall tax liability.
Secondly, the SME scheme will see a reduction in the enhancement that smaller businesses can claim, from 130% to 86%. This means that the amount of relief that smaller businesses can claim will be reduced. 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. This provides an additional incentive for businesses to invest in R&D, especially those that are still in the early stages of development and not yet profitable.
Changes to Capital Allowances
Capital Allowances are a type of tax relief that businesses can claim against the cost of investing in long-term business assets such as plant and machinery. Currently, there are different types of Capital Allowances available. But the government has announced new measures to replace the super-deduction which is set to end in March 2023.
The new measures are as follows:
Full Expensing (FE): 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. This means that businesses can claim the full amount of the cost of the asset as a tax deduction. Rather than claiming the cost over a period of several years.
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 has now extended it until 31st March 2026. The special rate pool includes assets such as long-life assets, integral features, and thermal insulation.
Updates to free childcare
As part of the Spring Budget announcement, Chancellor Jeremy Hunt revealed new measures to provide additional support for families with young children in England. Currently, children aged three and four are eligible for 30 hours of free childcare each week. But from April 2024, this will be extended to include children over the age of 9 months.
The new policy aims to help families with the cost of childcare and support parents who want to return to work after having a child. It is expected that equivalent funding will be announced for Wales, Scotland, and Northern Ireland in the future.
The change in eligibility means that families with younger children will have access to more free childcare. Which can be a significant expense for many households. The government hopes that this will provide some financial relief and enable parents to have greater flexibility in their working hours.
The Energy Price Guarantee, which caps household energy bills, was set to increase in April 2023. However, the government has extended the guarantee at the current level until the end of June 2023. This means that a typical household’s energy bill will be limited to £2,500 until the end of June. If you run your business from home. You can only claim tax relief on the portion of your bills that relate to the business.
For eligible businesses and other non-domestic users. The Energy Bill Relief Scheme will be replaced by the Energy Bills Discount Scheme. This new scheme will provide support for high energy bills until March 31, 2024. The Energy Bills Discount Scheme will be particularly useful for businesses operating in sectors that require high levels of energy use.
Private pensions are a popular option for self-employed individuals who do not have a workplace pension. It is a tax-efficient way to save for the future, as the government offers tax relief on private pension contributions.
The annual tax-free pension allowance, which is the amount that can be saved into a pension pot in a tax year before starting to pay tax, is currently set at £40,000. From April 2023, this threshold will increase to £60,000.
Under the current rules, individuals may be subject to a tax charge if their pension pot exceeds the lifetime allowance of £1,073,100. The Spring Budget removes this charge, and plans to abolish it completely in a future Finance Bill have been announced.
Other changes coming into effect from April 2023
The Chancellor’s Spring Budget announced some changes in the Autumn Statement 2022 that are set to come into effect from April 2023. Here are some of the key updates to look out for:
Changes to the National Living Wage and National Minimum Wage from April 2023
The National Living Wage (NLW) is the minimum wage that employers must pay to employees aged 23 or older who are not in the first year of an apprenticeship. The rate of the NLW will increase from £9.50 to £10.42 per hour 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. From April 2023, the hourly rates for NMW will also increase, as follows:
For those aged 21 and 22, the hourly rate will increase from £8.36 to £9.18.
18 to 20, the hourly rate will increase from £6.56 to £7.20.
16 and 17, the hourly rate will increase from £4.62 to £5.04.
For apprentices in their first year or under the age of 19. The hourly rate will increase from £4.30 to £4.69.
For apprentices who are aged 19 or over and have completed their first year of apprenticeship. The hourly rate will increase from £6.56 to £7.20.
These changes will affect employers who have staff in these age brackets, and will need to adjust their payroll accordingly.
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. This has an effect on when you start paying the additional rate of dividend tax (which is 39.35%)
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