Tax considerations for business owners 2023/2024

With the 2023/2024 financial year underway, Parry Jackson and Lewis Ratcliffe, Partners in our Business team, analyse key factors in relation to tax planning that business owners and managers should be considering for this fiscal year.

What tax rates are changing in 2023?

The basic rate of Income Tax will remain unchanged at 20% in April 2023, despite previous plans to lower this. However, from April 2023 the higher rate and additional income tax thresholds will be lowered. The top of the band for high rate tax payers will fall from £150,000 to £125,140, and for additional rate tax payers, income tax will be paid on earnings above £125,140 rather than £150,000. The decision to lower the additional rate threshold means that an expected 232,000 more people will fall into this tax bracket.

The Government have also announced that they will be continuing the super-deduction legacy that was due to end 31 March 2023, by replacing this with a new regime called ‘full expensing’. Whilst not as exciting as super-deduction, full expensing will allow businesses to claim 100% capital allowance on qualifying expenditure until 31 March 2026. It is hoped that this continuation will continue to encourage business investment for the foreseeable.

Due to arrive also on April 1 2023, the Government will introduce an increased rate of R&D relief for eligible companies enabling them to claim a repayment of almost 27% on qualifying R&D expenditure, compared to the previously announced rate of 18.6%.

Applying from the 6 April 2023, a change in dividends means that there will be a reduction in the amount charged at the nil rate from £2,000 to £1,000, and then to £500 from April 2024. It is estimated this reduction will affect 3,235,000 million individuals in 2023.

The rate of Income Tax applicable to dividend income, changed in April 2022 by 1.25%. For the last year, at the basic rate of tax, dividends have attracted a tax rate of 8.75%, at the higher rate 33.75%, and at the additional rate 39.35%.  This has made the traditional extraction routes of owner-managed businesses more expensive, and as such, careful consideration of other avenues should be explored such as pension contributions, charitable donations and ISAs for example.

Looking to the corporate side, 2022/2023 was the last year of corporation tax rates residing only at 19% with the introduction of higher rates for those businesses making profits in excess of £50,000. A rate of 25% will be introduced from 1 April 2023 where profits exceed £250,000, with profits between the two being taxed at a marginal rate of 26.5%.

For those that haven’t already, business owners should be reviewing their plans for the year ahead to mitigate the effects of this increase.

Should you be reviewing the legal structure of your business?

Reviewing the structure of your business may sound like a long-term consideration, which it is, but given the uncertainty of economies around the world, alongside increases in tax and rising costs, it’s important to consider if the structure of your business is aligned with your long and short-term goals.

Is it still appropriate to be a sole trader/partnership, or is now the time to incorporate?

Each structure has its own pros and cons, and it is not always about the tax that is payable. Whilst the draw of a company to pay lower tax rates has previously been a large factor in decision making, the gap is ever decreasing due to changes in tax legislation.

Now, it is far more important to consider your personal circumstances fully.

You can ask yourself:

• What are the long-term goals of your business?
• Do you need access to all the profits the business makes?
• Would a company restrict the flexibility of your business?
• Are there any wider commercial implications of each route?
• What are the tax implications for your business of different structures?

Are you planning to exit the business?

Having a strategy in place ahead of the time when you plan to exit your business is key to ensuring you maximise the proceeds, or minimise the tax position. Whether you are winding down the company or looking to sell, there are actions you can take to help.

You may still be entitled to some Business Asset Disposal Relief (BADR), which was formally known as Entrepreneur’s Relief (ER). Whilst reduced to a lifetime allowance of £1,000,000, it can still be very lucrative – enabling you to pay tax at 10% on profits from either the sale of your business, or, the final dissolution of the business.

Bearing this in mind, planning the remuneration you may need ahead of a business exit will be important to maximise the extraction at the lower tax rate. As with all reliefs, there are a number of conditions you must meet in order to qualify.

The structure of your business will affect the way you extract funds. For sole traders/partnerships you will be taxed on the full taxable profits of the business, whereas if you were trading as a company you need to further consider how you extract funds and remunerate yourselves. This could be through a salary, dividends, interest, pension contributions, or a mix.

When looking at your personal circumstances, understanding what the year ahead may have in store for your business will be important to decide upon the most suitable remuneration package for you. The starting point on all remuneration planning options is invariably how much do you need, or want, to take out of the business. Of course, this would have to be within the limits of what the business can afford.

How can you be Making Tax Digital (MTD) compliant?

As announced in 2022, a further delay for MTD for Income Tax Self-Assessment (ITSA) was announced with the introduction now due to occur in 2026.  Not only has the start date been deferred, it will now be introduced in stages with self-employed individuals and landlords with turnover in excess of £50,000 being required to join in 2026.  Those with turnover over £30,000 will be required to join from 2027.  The government is reviewing whether businesses with turnover below £30,000 will be required to join.

MTD for VAT has now been a legal requirement for all VAT registered businesses for a year and as such business owners should be well used to delivering their VAT information in a compliant manner.

You can read more about being MTD compliant here.

Take time to consider your ownership structure

The structure of the business will impact how you can extract the funds, but the ownership structure can also create opportunities when looking to plan for the future or extract funds.

To incentivise employee engagement, or perhaps to ensure the right succession is in place for your business you could consider an EOT.

If you are a sole trader, there may be some benefit in going into partnership with your spouse – allowing you to allocate profits between you both to manage potential tax liabilities.

Equally, when holding rental properties, consider if it is appropriate for them to be in your sole name? Could they be jointly owned? How are the profits being allocated between you if jointly owned?

Being married, you can choose how the profits are allocated from the rental properties where they are jointly owned. You must inform HMRC, but you could then utilise your spouse’s lower tax rate bandings if appropriate.

If you are trading as a company, you can consider:

• Who are the shareholders of the business?

If it is in your sole name, then it could be owned by yourself and your spouse. There are a number of different options depending on your circumstances, such as owning the share jointly, owning half the shares each, splitting the shares in another ratio, or creating different share classes.

In reviewing your ownership structure, you can better plan your extraction funds from the business, making use of dividend allowances, keeping income within the basic rate bands or perhaps making sure you do not lose your personal allowance through going over the threshold of £100,000 of taxable income.

In addition to thinking about short-term extraction planning, the ownership structure can also link in with the long-term exit plan, and having your spouse as a shareholder could lead to utilising another individuals BADR allowance, subject to several conditions.

How can pension contributions manage my tax position?

Pension contributions can be an effective tool in managing an individual’s tax position – especially where the effective rates of tax are in excess of the additional rates.

Tax relief is calculated by extending the band of income taxed at the basic rate of tax by the gross contribution.

As an example of the above, income between £100,000 and £125,140 can result in the loss of your personal allowance (with the effective rate of tax being 60%), and making a contribution could help to retain some of the allowance. Those who endure the high-income child benefit charge could also benefit here.

Needless to say, there are limits to what can be contributed each year and other factors to consider when deciding on a level of contribution. To be effective, contributions do need to be paid prior to the close of a tax year.

Separately, business owners are also able to make contributions, for example, if they are employees of their company. Employer contributions may be used to offset against company corporation tax.

Please note, we strongly advise you to seek support from an Independent Financial Advisor prior to making any decision as to whether pension contributions are right for you.

Tax implications for unincorporated businesses

The world of tax is continually changing, and for unincorporated businesses now is a good time to assess the impact of future changes on your business.

One of the most significant changes HMRC announced was the basis period reform, which comes into effect from 2024/25 onwards, with 2023/24 being a transitional year. Whilst 2024/2025 may seem a long way off, planning ahead can give you the cash flow foresight and potentially save tax.

This change only impacts sole traders/partnerships with a year-end other than 31 March or 5 April – as from 2024/25 HMRC are changing how they tax these businesses to align them with the tax year.

For some, this may mean a large amount of additional profits in the transitional year, but HMRC has allowed for this to be spread over 5 years to smooth the tax impact. Depending on the performance of your business this could be beneficial, but you should also consider your expected future tax rates.

All business owners should be analysing how tax will be impacting their company in 2023/2024, allowing you to plan effectively and mitigate the risk of tax implications. If you would like advice or support on anything mentioned in this article, then you can contact Parry or Lewis using the form below.