Insights

There are plenty of tax changes on the horizon which will impact SME owners and that are due to come into operation in April 2023. It’s therefore wise to be doing some tax planning to try and reduce some of the effects. Here are five actions you should consider sooner rather than later.

Tip 1: Minimise effects of the corporation tax increase

Corporation tax is going to increase on 1 April 2023; the main rate will rise from 19% to 25%, but the small profits rate will stay at 19% for all companies with profits of £50,000 or less. Clearly this is going to affect a lot of companies because at the most recent count in 2022, there were over 5m small and medium-sized enterprises (SMEs) in the UK, although not all of them are incorporated and will pay corporation tax.

What is significant about the forthcoming corporation tax increase is that some of the companies affected will actually be paying an effective rate of 26.5% on total profits, because of the way the marginal relief on profits between £50,000 and £250,000 is calculated. If a company is part of a group which includes associated companies, or if a company’s accounting period is less than 12 months, this higher marginal tax rate can start at a lower profit level than £50,000. Whilst it is not possible to do anything about paying higher taxes if your company profits are higher than the threshold, there are some planning actions that you may wish to consider if affected, as follows:

• For groups of companies that are trading as separate entities, identify and eliminate any associated companies that are unnecessary;
• Produce a profit forecast for the 2023/24 tax year and if this is showing your profits will exceed £50,000, take action where possible to reduce profits to below the threshold.

Bear in mind however that whilst such actions will reduce the rate of corporation tax payable, they will have wider implications on company performance and perception which should also be considered.

Tip 2: Review profits extraction and remuneration for directors and employees

The way funds are extracted from a company will have an impact on how much tax is payable. Before making any decisions, it’s important to calculate how much the company directors need in income and in what timescales. Then there are various approaches to consider. If the directors award themselves a higher salary and make pension contributions, this will reduce the company’s taxable profits but the income tax payable on the salary element may be disproportionate to the savings made on corporation tax and additional pension contributions could tie up income that may be used elsewhere. Voting larger dividends may be more tax efficient but will not reduce taxable profits.

Typically a small, limited company business owner tends to opt for a minimal salary to achieve the lowest level of national insurance contributions (NIC), with extra profits voted as dividends. Although the rates of tax payable on dividends are still lower than income tax, levels have increased in recent years and the allowances are also reducing sharply.

Previously the tax free dividend allowance was £2,000 but will be reducing to £1,000 in 2023/24 and then £500 in 2024/25.

Dividend tax rates, for all payments in excess of the annual dividend allowance are:

• 75% for basic rate band (compared to a salary which is taxed at the basic rate of income tax);
• 75% for higher rate taxpayers (salary is taxed at 40%);
• 35% for additional rate taxpayers (salary is taxed at 45%).

Before making any decisions regarding how to extract funds, it is important to compare the taxable difference between taking a higher salary to reduce corporation tax and the actual rate of corporation tax from April.

Provided that funds could be locked away, one option is to increase employer pension contributions. One of the changes introduced in Spring Budget 2023 was to increase the annual allowance for pension contributions to £60,000.

Once the calculations have highlighted the best options, it is important that the tax planning approach taken is commercially reasonable and unlikely to be questioned by HMRC. Remuneration packages need to be commensurate with the level of work performed and must cover the minimum wage.

Tip 3: Push back capital equipment investments to April 2023

One of the pandemic policies introduced to get businesses investing again was the super deduction, which offered tax relief up to 130% of the cost of qualifying new plant and machinery. This will stop at the end of March 2023 with the introduction of a new full expensing capital allowances regime which is uncapped for the next three years. Although the super deduction is finishing on 31 March, if a company’s corporation tax will be increasing to the higher rate (or the even higher marginal 26.5% rate), it will be worth postponing any purchases until after 31 March 2023. This could result in saving corporation tax whilst having access to the new capital allowances regime.

Tip 4: Review research activities to stay eligible for R&D tax credits

R&D tax credit relief will be less generous from April 2023, dropping from the current 14.5% to 10%. This is likely to be a major blow to many innovative companies who have relied on the relief. In the Spring Budget, Jeremy Hunt announced that there will be a new recognition of companies qualifying as ‘R&D intensive’ which will be able to continue to claim the 14.5% rate. To achieve this category, a company will need to be able to demonstrate that 40% of their business expenditure goes towards financing the cost of R&D. If you wish to continue claiming R&D tax credits, it will be important to review expenditure with a tax adviser to be sure you can qualify, because in addition to these changes, HMRC is increasing its scrutiny of R&D claims to combat fraud.

Tip 5: Find ways to raise investment funds through SEIS

The only policy that remains from the short Liz Truss era is the increased generosity of the tax advantaged equity investment scheme SEIS (Seed Investment Enterprise Scheme) which is aimed at start-up businesses.

From 6 April 2023, the threshold for funds which can be raised through SEIS will increase from £150,000 to £250,000 and the company inception age limit will also increase from two to three years. The scheme will also become more generous for investors, who will be able to subscribe in double the cost of shares each year; from £100,000 to £200,000.

To discuss these tax planning strategies in more detail and understand how they can apply to your own circumstances, contact us via partners@rjp.co.uk.