‘Z’ is for Zzzzz . . .
The building blocks of accountancy.
Z is for Zzzz…
Julia Burn reaches the destination in her A to Z of top tips. Z is for Zzzzzzzzz – don’t sleep through the upcoming tax changes.
There is no doubt that the last couple of years have had an enormous impact on the economy and finances of our country, but also highlighted where more funding will be required in the future.
As a result, the Government has had to consider how to improve the situation and recover from the pandemic and its consequences. Unfortunately, this is not necessarily good news for some taxpayers.
Below, I have summarised the main changes that are being proposed or are due to be introduced to the current tax system in the near future which may have an impact on you personally or your companies:
Income tax
No changes have been announced to the personal allowance (currently £12,570) and tax rate bands (basic rate limit of £37,700, higher rate limit up to £150,000) as well as annual exemption for capital gains tax purposes (currently £12,300) and these are likely to be frozen up to and including the tax year 2025-26.
The dividend allowance and savings allowance will remain as £2,000 and £5,000 respectively and there has been no indication that these will change.
However, the Government has proposed an increase to the dividend tax rates by 1.25% with effect from April 2022 to 8.75%, 33.75% and 39.35% for basic, higher and additional-rate taxpayers respectively.
National Insurance
In line with the increase to the dividend tax rates, the Government has announced that a temporary increase will also be introduced to the National Insurance Contribution (NIC) rates.
All rates will be increased by 1.25% for the tax year 2022-23 and the rates will return to their current level from 2023-24 onwards, this includes both employees’ NI and employer’s NI.
However, this is when the ‘health and social care levy’ of 1.25% will be introduced and it will apply to all individuals, including those who are above State Pension age and still working (as employees or self-employed) who currently are exempt from paying NIC.
All these revenues will be ringfenced for health and social care.
Benefits in kind – car benefits
The benefit-in-kind rates for company cars registered after 6 April 2020 have increased by 1%.
This means that even cars which are 100% electric will now be liable to a 1% benefit-in-kind charge provided that the car was first registered on or after the start of the 2020-21 tax year. This rate is set to see an additional increase to 2% from the 2021-22 tax year onwards.
Corporation tax
While the current Corporation tax rate of 19% will remain in force until April 2022, increases to Corporation tax are due to come in with effect from April 2023 when the highest rate will be 25% and it will apply to profits in excess of £250,000.
Profits will still be taxed at 19% up to £50,000 and the tax rate will be tiered and gradually increase for profits between £50,000 and £250,000.
No details have, however, been announced yet.
Capital allowances
A new super-deduction capital allowance can be used between 1 April 2021 and 31 March 2023 on qualifying new plant and machinery.
This means that companies can claim a deduction of 130% of the qualifying expenditure as a first-year capital allowance.
In addition, a new 50% first-year allowance will be in place for companies until 31 March 2023 for special rate – including long life – assets.
The Annual Investment Allowance which allows a 100% deduction on qualifying plant and machinery has been temporarily increased up to £1m until 31 December 2021. The allowance will be reversed to £200,000 from 1 January 2022.
Review of your tax position
As business owners, when you are discussing your tax affairs with your advisers, you may focus on the effective rate of tax being suffered on the amounts that you are withdrawing from the business.
As you are owners of the business, the overall tax burden is relevant, as everything that is left over in the company is also yours.
This means corporation tax and employers NI suffered by the company need to also be considered alongside income tax and NI paid by the individual – and the new Health and Social Care Levy affecting both the company and the individual.
It will also be good to consider remuneration packages and the most efficient methods for each individual.
As discussed in previous issues of Independent Practitioner Today, to encourage the taxpayers to save for the future, tax relief is available for contributions you make to your pension. This is both at source when you make contributions as well as company pension payments being an allowable deduction for corporation tax purposes.
With tax rates increasing on all forms of remuneration, it is likely that pension contributions will increase in popularity, despite the restrictions in place, as these can be made tax-efficiently.
With all of the upcoming changes, it is more important than ever to ensure you review how these changes will affect you individually and your practices and to ensure that accounting data is regularly updated so you have real-time information.
This will enable you to update budgets and forecasts regularly and foresee and react to any pinch points early.
Julia Burn (right) is a director at Blick Rothenberg and part of the team that advises medical practitioners