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The Changing Face of the UK Tax Sphere

As accountants and business advisers, we’re used to keeping on top of the ever-changing UK tax changes in legislation within the UK. The landscape has evolved even more rapidly over the last 18 months since the COVID pandemic swept across the world.

We’re accustomed to annual amendments to the personal allowance and capital gains tax allowance thresholds being the most commonly occurring changes we see. However, 2020 brought VAT deferrals, the furlough scheme and self-employed grants, all of which had an impact on the tax system in some way.

HMRC has a roadmap on which it plans to make further UK tax changes across the board over the coming years. We’ll discuss some of these below in our updated UK tax guide.

Updates to National Insurance (NI) and Dividend Tax Rates

The government has recently announced an increase to both NI rates and dividend tax rates from 6 April 2022. The planned 1.25% increase to both taxes will go ahead and will affect people from all walks of business.

Employed people will pay an additional 1.25% on any earnings over £9,568. This change will also affect people who pay higher rate tax (earning over £50,270) and additional rate tax (those who earn above £150,000).

Self-employed people will also be subject to the change, paying an additional 1.25% NI over £9,568.

People who earn income via dividends will also be affected by the 1.25% rise at all levels of income. 

The table below should help explain the changes:

Table

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Source: moneysavingexpert.com

Alignment of Tax Periods for Sole Traders and Partnerships

A significant portion of our sole trader and partnership clients have their period ends aligned with the 5 April tax year end. There are however a number whose year ends differ to this date. These clients will be affected by the new tax year basis which will come into force in the 2022/2023 tax year.

Clients with a May year end have been used to paying their taxes 20 months after the period ends. For example, a client with a 31 May 2021 year end will only pay the tax due on profits in that period in January 2022. 

Using the above example, in 2022/2023, clients will have some of the tax they pay advanced in order to change and align their year end to 31 March 2023. Such a client will pay tax on the profits they make to 31 May 2022 as well as the profits they make on the 10 months from 1 May 2022 to 31 March 2023. 

This might feel penal in that it will accelerate the payment of the taxes in this year. Although, it would mean if you were to ever stop trading, you’d have paid your taxes closer to the period in which your trade ceases. Cash flow planning for this additional element of tax in 2022/2023 will be vital and we’ll be here to help you through that period of additional cash out of your business. 

Making Tax Digital (MTD) for Non-VAT Registered Sole Traders and Partnerships

You’ll no doubt have seen the term MTD (Making Tax Digital) floating around in the tax atmosphere for the last few years. HMRC has already implemented this change for VAT registered businesses. From 6 April 2023, the MTD legislation will affect non-VAT registered sole traders and partnerships.

Many businesses still operate older systems when it comes to keeping track of their business performance. MTD will force clients to move to cloud-based accounting software in order to make returns to HMRC each quarter, as opposed to the historical annual return which needs to be completed by January each year.

The new MTD rules for sole traders and partnerships will help to some degree with the impact of personal taxes on your cash flows. In addition to making quarterly submissions, you’ll make payments on account each quarter, in line with the tax due on your profits for that quarter.

At the end of the fourth quarter, you’ll then be given time to make a final return for the year along with any balancing payment which might be due.

We’ve been huge fans of Xero (as well as being experts!) for a long time now, and we’re certain that our team will be able to help you navigate the changes. In fact, we can bring your business into the era of digital accounting with ease.

Corporation Tax Changes from 1 April 2023

Another legacy of the COVID pandemic is the need to recover some of the costs to the treasury caused by the pandemic itself and the support offered to businesses.

HMRC has announced that it will increase Corporation Tax for Limited Companies from 1 April 2023. Businesses that make taxable profits of less than £50,000 each year will continue to pay 19% Corporation Tax. Businesses whose profits exceed £250,000 will pay Corporation Tax at the rate of 25%.

Where a business makes profits between these two amounts, the amount of Corporation Tax will be tapered, providing a gradual increase in the rate of Corporation Tax from 19% up to 25%. Specific details of this ‘marginal rate’ are yet to be released.

The lower limit of £50,000 and the upper limit of £250,000 will be affected by the associated companies rule. Where two companies share the same owners, or two companies have a majority owner (i.e. over 50%), then the limits will be split by the number of associated companies.

An example of this would be where a business owner has two associated companies. The lower limit for each company would be divided by two and would become £25,000, with the upper limit being £125,000.

It may be that planning is required over the coming 18 months to ensure that companies have the correct trade in the correct company. 

Kirkwood Wilson’s UK Tax Guide

The team at Kirkwood Wilson is always looking at ways we can help you with tax planning and the next couple of years will certainly be interesting in terms of the tax landscape and how we can offer our assistance. 
To receive the most comprehensive tax planning advice from KW Accountants, be sure to get in touch on 01704 546000 or email us at [email protected].

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