End of Year Tax Planning

 In Tax

End of Year Tax Planning 2023

The end of the financial year is fast approaching, and with changes and reductions in some of the tax-free allowances from April, it’s important to consider tax planning during March 2023.

In this email we’ll cover the super deduction, dividend taxes, the dividend tax allowance, basic rate tax, employer’s allowance, the best salary amount to take as a director for 2023-2024, capital gains tax, pensions, and personal savings.

The Super Deduction

The super deduction is a temporary tax relief which was announced in the 2021 budget to encourage businesses to invest in new plant and machinery. This relief allows businesses to claim 130% of the cost of ‘qualifying plant and machinery’ against their taxable profits, instead of the usual 100% in the first year.

For those that work in offices, plant and machinery can include:

• Computers, laptops, tablets, smart phones
• Office equipment including desks, chairs and shelving.

The super deduction is available for qualifying assets between 1 April 2021 and 31 March 2023, so if you need a new computer, or office desk, now is a good time before the end of the tax year.

Dividend Allowance

For the tax year 2023-2024, the dividend tax allowance will be reduced from £2,000 to £1,000 and so from April 2023, you will receive up to £1,000 in dividends, tax-free. The dividend allowance will be further reduced in 2024-2025 to £500.00.

We will ensure the first £2,000 in dividends are claimed tax free for each shareholder for the 2022-2023 tax year and up to £1,000 in 2023-2024.

Dividend Tax Rates

Any dividend income above this amount will be taxed according to the applicable tax rates.

The tax rates for dividends will depend on the income tax band you fall into, starting at 8.75% for the basic rate band and 33.75% in the higher rate band.

This is the same rate as the 2022-2023 tax year, so there is no immediate benefit in declaring dividends at the end of March, due to the rate changing in April.

Basic Rate Tax

For the tax year 2023-2024, the basic rate of income tax will remain at 20%, which means that if you are a sole trader and your taxable income falls within the basic rate band, you’ll pay income tax at a rate of 20%.

The basic rate tax band for 2023-2024 is £37,700. This is in addition to the personal allowance of £12,570, giving a total of £50,270 before reaching the higher rate tax bracket.

Employment Allowance

The employer’s allowance is a deduction from the employer’s NICs (National Insurance contributions). This allowance reduces the amount of NICs that companies have to pay.

The Employment Allowance remains at £5,000 for 2023-2024 and this means you will receive a credit equal to any amount which would have otherwise been paid in employers’ national insurance, up to a maximum of £5,000.

National Living Wage

If you have employees, it is worth noting the National Living Wage will increase in April by 9.7%, increasing the hourly rate for employees from £9.50 to £10.42 from April 2023.

National minimum wage amounts for April 2023

• National Living Wage (23 and over): £10.42 (increase from £9.50)
• 21-22: £10.18 (increase from £9.18)
• 18-20: £7.49 (increase from £6.83)
• Under 18: £5.28 (increase from £4.81)
• Apprentice (under 19, or over 19 and in the first year of apprenticeship)
£5.28 (increase from £4.81)

Optimum Salary as a Director

As a director of a Limited Company, you can take a salary as part of your remuneration. The best salary amount to take will depend on your individual circumstances, but there are some general guidelines to consider.

If you’re the sole director and employee of your company, the most tax-efficient salary to take is usually the ‘National Insurance secondary threshold’. For the tax year 2023-2024, this threshold is £175 per week, or £9,100 per year, which is the same as in 2022-2023.

If you have employees in your company, the most tax-efficient salary to take will depend on a variety of factors, such as National Insurance contributions, employer’s pension contributions, and your personal tax situation.

However as a general rule, if you have at least one other employee who earns over £9,100, then it makes sense to draw £12,570 as you will be entitled to the employment allowance, which overall will save approximately £100 per annum in tax, instead of taking £9,100 as a salary and the rest as dividends.

Be sure to pay your PAYE and NI on time though as one late payment penalty of £100 can soon swallow up this tax saving.

Pensions

If you have a limited company with sufficient profits, you can benefit by making company pension contributions.

Company contributions are unlimited but as an individual, you can contribute up to £40,000, or up to 100% of your earnings (salary), whichever is the lower, and this should include employer contributions.

You receive corporation tax relief of 19% on company contributions, as you would with any other business expenses.

In the basic rate band, it is more tax efficient to make a company pension contribution than to withdraw the dividends and then make a personal pension contribution, where you would pay 19% corporation tax, plus 8.75% dividend tax on dividends taken.

Remember though, you need to ensure the surplus funds are not needed to be drawn as dividends to pay personal bills, and once the funds go into the pension, they locked into the pension until you are over 55.

Capital Gains Tax

Capital gains tax (CGT) is the tax you pay on the profit you make when you sell an asset, such as property or shares. The amount of CGT you pay will depend on your income tax band.

The Annual Exempt Amount for capital gains tax will be cut from £12,300 to £6,000 from April 2023 and then to £3,000 from April 2024.

Personal Savings Allowance

The personal savings allowance is £1,000 of tax-free interest for basic rate taxpayers, and £500 for higher rate taxpayers.

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