Six things to know about the new tax year
In the context of spiralling inflationary pressure, many businesses will face an increasing tax burden in 2022/23 owing to the freezing of many tax allowances and tax hikes on dividend income and National Insurance charges as part of the new Health and Social Care Levy. The levy is intended to boost NHS and social care funding.
Both National Insurance and dividend rates have increased by 1.25% from April 2022.
To help you keep track we have listed below a handy summary of key changes that businesses should be aware of:
- National Insurance rates – increase in rates of 1.25% but the threshold at which you start to pay National Insurance will rise
- National Minimum Wage – increase from April 2022
- Income tax – the personal allowance remains frozen
- Dividend rates – an increase of 1.25% from April
- Corporation tax – be aware of future increases
- Other taxes – rates remain largely frozen
Let’s now explore in more detail each of the changes and explain how the changes will impact your business:
1. National Insurance rates
National Insurance 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 initially be funded through the National Insurance increase.
The new Health and Social Care Levy will 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.
We have shown below the increased rates for employees and employers:
| Employee Main / higher rate | Employer | |
|---|---|---|
| Previous NICs rates for 2021-22 | 12% / 2% | 13.8% |
| 2022-23 NICs rates | 13.25% / 3.25% | 15.05% |
Where an individual earns above what is known as the Secondary Threshold, the business must start paying employer contributions, using the above rates.
Where an individual earns above what is known as the Primary Threshold, they have to start paying employee contributions, using the above rates.
In a last-minute change arising from the Spring Statement, the Government announced it will increase both the Primary Threshold and Lower Profits Limit of National Insurance to bring them in line with the income tax personal allowance of £12,570.
However, the way this will be introduced, depends on your particular circumstances:
Employees
For an employee, between 6th April and 5th July 2022, they will be able to earn £190 a week without paying Class 1 National Insurance. Then, between 6th July 2022 and 5th April 2023, this weekly threshold will increase to £242.
Directors
Directors of limited companies will be treated differently as they pay National Insurance on an annual basis. For 2022-23, a director will be 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.
We have also included a table to show the impact on the Self-Employed:
| Self-employed main/higher rate | |
|---|---|
| Previous NICs rates for 2021-22 | 9% / 2% |
| 2022-23 NICs rates | 10.25% / 3.25% |
The self-employed also pay National Insurance on an annual basis, and for the 2022-23 tax year, will be able to earn £11,908 before paying Class 4 National Insurance.
How does this impact my business?
Aside from the complexity of these last-minute changes, employers need to make sure they have factored in these increases to their payroll costs.
The Institute of Directors recently reported that 39% of their surveyed business leaders advised that employment taxes are having a negative impact on their organisation. This is up from 25% before the increase in National Insurance contributions was announced. These rises will be a major concern for any employer.
Directors need to be mindful of these changes when planning their profit extraction and make full use of any reliefs to mitigate charges where possible. The Chancellor also announced in the Spring Statement 2022 that the Employment Allowance would increase to £5,000 from April 2022, from £4,000 for 2021/22. Where eligible, a company can reduce its employer Class 1 National Insurance contributions by a certain amount each tax year and this should be factored into any salary extraction planning.
2. National Minimum Wage
From Friday 1st April 2022, the National Minimum Wage increases as follows:
| Rate from April 2022 | April 2021 to March 2022 | Increase | |
|---|---|---|---|
| National Living Wage | £9.50 | £8.91 | 6.6% |
| 21-22 Year Old Rate | £9.18 | £8.36 | 9.8% |
| 18-20 Year Old Rate | £6.83 | £6.56 | 4.1% |
| 16-17 Year Old Rate | £4.81 | £4.62 | 4.1% |
| Apprentice Rate | £4.81 | £4.30 | 11.9% |
How does this impact my business?
The payment of the national minimum wage is very important and businesses need to make sure they pay workers at the correct rate. Failure to do so could result in reputational damage, public naming, and criminal prosecution in extreme cases of deliberate failure. As well as factoring in the National Insurance rises, employers also need to plan for these increases.
3. Income tax in 2022/23
Most taxpayers benefit from a personal allowance of £12,570. This allowance is taken from your income and the balance of your non savings income will then subject to tax. For taxpayers who earn more than £100,000, their personal allowance is reduced by £1 for every £2 earned over £100,000.
For the tax year ending 5th April 2023, the personal income tax threshold of £12,570 is frozen, and the various bands of income tax also remain frozen in England Wales and Northern Ireland as follows:
England, Wales and Northern Ireland income tax bands for 2022/23
| Band | Taxable Income | Tax Rate |
|---|---|---|
| Basic rate taxpayer | £12,570 to £50,270 | 20% |
| Higher rate taxpayer | £50,271 to £150,000 | 40% |
| Additional rate taxpayer | Over £150,000 | 45% |
In Scotland, income tax rates are unchanged compared to 2021/22, but 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:
Scottish Income Tax Rates and Bands for 2022-23
| Band | Income Threshold | Tax Rate |
|---|---|---|
| Starter Rate | Over £12,570 - £14,732 | 19% |
| Basic Rate | Over £14,732 - £25,688 | 20% |
| Intermediate Rate | Over £25,688 - £43,662 | 21% |
| Higher Rate | Over £43,662 - £150,000 | 41% |
| Top Rate | Over £150,000 | 46% |
How does this impact my business?
The freezing of the personal allowance and income tax bands, coupled with high inflation will lead to increasing tax exposure and it is vital to start planning for this now.
Where your income exceeds £150,000, you start to pay the additional rate of income tax, which is 45% (46% in Scotland). Where your income is between £100,000 and £125,140, you are subject to an effective ‘super rate’ of tax rate of around 60%. This is because, after your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 you go over the £100,000 tax bracket.
You may be able to reduce your tax exposure with some simple tax planning techniques, which can include making personal pension contributions or charitable donations.
For basic rate taxpayer, they may be able to transfer some of their unused personal allowance to their spouse or civil partner if neither is a higher rate taxpayer and they are not using all their allowance.
Forearmed is forewarned, so a practical tip would be to get your tax return submitted early so you have plenty advance warning of future liabilities.
The allowances for savings interest income are also frozen in 2022/23.
4. Dividend rates
The rates of tax an individual pays on dividend income have been steady since 2016 but in 2022/23, they increase by 1.25 percentage points due to the new Health and Social Care Levy..
In 2022/23, the dividend allowance is £2,000. Any dividend income within the dividend allowance is taxed at a special rate of 0%. Beyond that, the rates of tax you pay on dividend income will be increased by 1.25% as follows:
| 2021/22 | 2022/23 | |
|---|---|---|
| Basic rate taxpayer | 7.5% | 8.75% |
| Higher rate taxpayer | 32.5% | 33.75% |
| Additional rate taxpayer | 38.1% | 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 2022/23 but be aware of proposed future increases and start planning for this now.
The Super Deduction relief for capital expenditure is due to end on 31st March 2023, so business should carefully consider their options when planning future capital investment.
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%.
The Government will also bring in a new small profits rate, which means companies with profits of £50,000 or less can continue to pay corporation tax at the 19% rate. There will be tapered rates for those with profits between £50,000 and £250,000.
Company owners should also be aware that these upper and lower limits are reduced where there are what are called associated companies. Where companies are associated, for example, two companies under common ownership, the profit limits are divided among the associated companies and these revised limits are then used in the marginal relief calculation.
Not only should businesses be looking at the impact of these significant tax increases but also considering their corporate structure to determine the impact on their marginal relief calculation.
6. Other taxes
As announced in the March 2021 Budget, due to the impact of Covid-19, the Chancellor, Rishi Sunak announced a broad freeze of tax thresholds and allowances until 2026:
- The Annual Exempt Amount for Capital Gains Tax (frozen at £12,300)
- The inheritance tax (IHT) threshold (frozen at £325,000)
- The IHT residence nil rate band (frozen at £175,000)
- The lifetime pension allowance (frozen at £1,073,100)
- The pension annual allowance (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 fall within the scope of tax as inflation bites and pushes them into higher bands.
Although the move prevented an immediate rise in tax, these frozen rates will impact your business and personal finances over the longer term.
You should factor this into your business plan and consider reviewing your personal circumstances, so you are prepared for these increases and are as tax efficient as possible.
How can we help
Dedicating time now to look ahead at 2023 and beyond will mean you will have a comprehensive plan in place for the coming months. If you need any help or advice with the financial aspects of running your business or your own personal tax affairs, please call us today on 020 3981 8102 or complete our online enquiry form.
Last updated: 8th April 2022