Are Taxes Going up for me?
What Taxes are going up?
In the past few years The Chancellor Rishi Sunak has announced tax increases that will affect small businesses and limited companies with Corporation Tax, Dividend Tax and National Insurance all in line for an increase. This has largely been in response to the Government's efforts to support business over the COVID-19 pandemic and to help pay for what the Government is calling the health and social care levy.
What is the new Corporation Tax Rate?
From April 1st 2023 there will be a new rate of corporation tax for any business with profits of over £50,000. This will be increased from the current rate of 19% to 25%, this will only affect the profits over £50,000.
There will be a sliding scale called marginal relief between the profit levels of £50,000 and £250,000. So if you profits fall between those two amounts it will be taxed progressively up to a maximum of 25%
If your taxable profits are below £50,000 you will continue to be taxed at the 19% as normal, there will not be any change or increase in your taxes for the coming tax year.
What is Marginal Relief?
Marginal relief means that the profits between the lower amount of £50,000 and the higher rate of £250,000 will be taxed at progressively increasing rates up to the amount of £250,000 where you will be paying tax at the new corporation rate of 25%.
Marginal relief effectively applies a sliding scale to the corporation tax rates from taxable profits of £50,000 to the upper limit of £250,000. This rather complex calculation will be done by your accountant when they prepare your tax returns and it is time to pay corporation tax.
Dividend Tax Increased by 1.25%
From April 1st 2022 the tax on dividends will increase. The increase that will be applied to your dividend payments that are declared in self assessment tax return and will depend on what income tax band that you fall within. The new dividend tax rates will be 8.75% at the basic rate of income tax, 33.75% at the higher rate of tax and 39.35% at the additional rate of tax. The tax free amount of £2000 per tax year for dividends will still apply.
Therefore the directors of limited companies with higher amounts of dividend income will face rate increases not only in terms of corporation tax but also in the dividend tax they pay as well.
National Insurance Increased by 1.25%
Along with the dividend tax increase an increase in national insurance was also announced. This will take effect after the 1st of April 2022 and will mean that national insurance contribution rates are increased by 1.25% for employees and employers.
Class 4 national insurance rate paid by people that are self employed will also increase by a further 1.25% so the increase will be paid by employed and self employed workers alike. This is again obviously to pay for the Government’s response to the COVID pandemic and to fund increased social care costs and state pension costs.
What does this mean for me?
We need to wait and see if these changes actually become law. There have been a number of new taxes announced by the government in recent history that have been delayed from the changes to IR35, Making Tax Digital and changes to the Construction Industry Scheme taxes.
But certainly it would be prudent to plan ahead for these changes when they are going to take effect. If you are planning on taking dividends out of your company over the next tax year or tax years it would be sensible to bring forward the payment of dividends to avoid paying at the new higher rates of tax.
If you are a small limited company director who pays himself by salary you will be facing a national insurance increase of both 1.25% employee and 1.25% employer national insurance. This along with the increase in corporation tax in 2023 to 25% will mean a steep increase in tax for the small business owner.
Next Steps
If you want to discuss these changes to the rates of corporation tax, dividend tax and national insurance please contact us to arrange a call to see if we can help you and your business be more tax efficient.