New Tax year: What has changed?
We are now in a new tax year from 6 April, so it is time to prepare your business and personal finances for the year ahead to work compliantly and tax efficiently.
What’s changed?
Businesses will face increasing costs and tax pressure in the coming tax year, including a freeze on the personal allowance set at £12,570 till 2026 and of course the tax hikes on dividend income and National Insurance Contributions (NICs) charges as part of the new Health and Social Care Levy.
Overview of Tax changes in force from April 2022
A handy overview of what has changed from 6th April 2022:
NICs – increase in all NICs rates of 1.25% ; threshold to increase from July 2022
National Minimum Wage – increase from April 2022
Income tax – the personal allowance remains frozen at £12,570 till 2026
Dividend rates – an increase of 1.25% from April 2022
Corporation tax –Profits over £50,000 will see increase from April 2023 to 25%
Other taxes – remain largely frozen
1. National Insurance Contributions (NICs)
Overview of increases
All NICs rates rose by 1.25% from April 2022 to pay for the Government’s new Health and Social Care Levy.
From April 2023, the levy will show as a separate deduction, but will included as part of your NICs payments.
The changes apply to both employees and employers liable for Class 1 National Insurance as well as to self-employed individuals on their Class 4 National Insurance charges.
Where an individual earns above what is known as the Secondary Threshold, the business must start paying employer contributions, using the above rates.
Change to NICs threshold
The Government announced in the Spring Statement it will increase both the Primary Threshold and Lower Profits Limit to bring them in line with the income tax personal allowance of £12,570.
If you are an employee, this means that from 6th April and 5th July 2022, you will be able to earn £190 a week without paying Class 1 National Insurance.
From 6th July 2022 and 5th April 2023, the weekly threshold will increase to £242 before NICs payments kick in.
If you are a single director company. you able to earn £11,908 before paying Class 1 National Insurance. This provides for 13 weeks of £9,880 and 39 weeks of £12,570.
That means the benefit directors will receive will be in line with employees.
If you are self employed, you will be able to earn £11,908 before paying Class 4 National Insurance.
Employment allowance if you hire staff
The Employment Allowance will increase from £4,000 to £5,000 from April 2022, from £4,000 for 2021/22.
2. National Minimum Wage changes
From Friday 1st April 2022, the National Minimum Wage changes are:
Increase to £9.50.
For 21-22 Year Old: Increase by 9.8% to £9.18
For 18-20 Year Old: Increase by 4.1% to £6.83
For 16-17 Year Old: Increase by 4.1% to £4.62
Apprentice Rate: Increase by 11.9% to £4.81
How does this impact my business?
The payment of the national minimum wage is a legal requirement for businesses when paying workers. Failure to do so could result in reputational damage and criminal prosecution.
3. Income tax in 2022/23
All UK taxpayers benefit from tax free income before you start paying income tax, known as the personal allowance, as is currently frozen at£12,570 till April 2026. For taxpayers who earn more than £100,000, your personal allowance is reduced by £1 for every £2 earned.
The various bands of income tax also remain frozen for England Wales and Northern Ireland:
* Basic rate taxpayer, earning between £12,570 to £50,270: pay 20% income tax
* Higher rate taxpayer, earning between £50,271 to £150,000- p ay 40% income tax
* Additional rate taxpayer, earning Over £150,000, pay 45% income tax
In Scotland, the Scottish Government will increase the starter and basic rate income tax thresholds in line with inflation. The Scottish Government will leave the middle, higher and top rate thresholds frozen, as follows:
Starter Rate basic taxpayer, earning between £12,570 - £14,732: pay 19% income tax
Basic Rate taxpayer, earning between £14,732 - £25,688: pay 20% income tax
Intermediate Rate, earning between£25,688 - £43,662, pay 21% income tax
Higher Rate, earning between £43,662 - £150,000, pay 41% income tax
Top Rate, earning over £150,000, pay 46% income tax
How does this impact my business?
With various tax hikes now in place and with increasing inflation, you will need to consider your tax exposure in the round to help minimise it and retain good cash flow.
Please get in touch if you are looking for tailored tax advice.
4. Dividend rates increase
The dividend tax rate has increased by 1.25% due to the new Health and Social Care Levy.
The dividend allowance, or the amount you can extract in profit before paying dividend tax remains at £2,000.
The changes are noted below:
* Basic rate taxpayer: increase from 7.5% to 8.75%
* Higher rate taxpayer: increase from 32.5% to 33.75%
* Additional rate taxpayer: increase from 38.1% to 39.35%
How does this impact my business?
For a company director, this 1.25% increase is important to factor into your remuneration planning if you decide to extract profit from your limited company.
Not only will you need to factor in the additional tax but also you should be mindful of the cashflow impact on payments on account, which are payable as part of the self-assessment personal tax system.
5. Corporation tax
Corporation tax remains at 19% in the coming tax year in 2022/23 but will change from April 2023.
Until then, limited companies can make use of the Super Deduction relief, due to finish on 31 March 2023.
Now is the time to consider future capital investment in your business, so you have the cash flow to invest as well as sustain your business, whilst keeping up with tax payments.
How does this impact my business?
While the rate of corporation tax of 19% remains the same in 2022/23, from April 2023, the rate for companies with profits over £250,000 will increase to 25%.
There will be a new small profits rate for micro businesses with businesses with profit less than £50,000 will continue to pay 19%. There will be tapered rates for those with profits between £50,000 and £250,000.
If you want to learn more, watch our analysis here.
6. Other taxes
The following tax thresholds and allowances until 2026 are frozen:
The Annual Exempt Amount for Capital Gains Tax is frozen at £12,300
The inheritance tax (IHT) threshold is frozen at £325,000
The IHT residence nil rate band is frozen at £175,000
The lifetime pension allowance is frozen at £1,073,100
The pension annual allowance is frozen at £40,000
How does this impact my business?
When tax allowances and bands are frozen, this is often referred to as a ‘stealth tax’ because more people will pay tax as inflation pushing them into higher tax bands.
These frozen rates will impact both your business and personal finances over the longer term.
Therefore you should factor these frozen tax rates in your plans and prepare for long-term tax efficiencies.
Time to tax plan?
Having a plan for increased tax burdens with a backdrop of a difficult operating environment is important to sustain your business and personal wealth.
If you need any help or advice with the financial aspects of running your business or your own personal tax affairs, please get in touch.
