The bill for COVID is coming, make no mistake about it. Yet, in a clever game of political smoke and mirrors, Chancellor of the Exchequer Rishi Sunak served up some hope in the Budget, freezing personal and corporation tax bands rather than increasing tax rates as originally mooted. All seems to be well until you delve a little deeper into the impact this will have.
Income Tax bands have been frozen until April 2026, meaning that whilst on paper the amount you pay tax on remains constant, in real terms there will be a steady increase in the amount being paid to HMRC’s coffers due to the impact of inflation. To put this measure into context, had rates been frozen in 2016/2017 then the allowances in real terms would sit at £11,000 and £32,000 today, not £12,500 and £37,500. This means that an individual earning £50,000 would be subject to tax on £7,000 at 40% which otherwise would have been taxable at 20% – quite a significant hike in tax.
Corporation Tax, whilst not experiencing any immediate rise, will see an increase from 19% to 25% for companies with profits of at least £250,000 from 1 April 2023. That is an increase of 32%, made up of the first £50,000 of profits taxed at 19% and the next £200,000 taxed at 26.5%. Should there be anything thereafter it will be taxed at 25%.
This is compounded further when taking dividends, with additional rate dividends initially taxed at 38.1%, but when 26.5% Corporation Tax is taken into account this effectively means a 54.5% marginal rate of tax.
So, what can you do? There are still some tax breaks, including a new ‘super-deduction’ for companies investing in qualifying new plant and machinery between 1 April 2021 and 31 March 2023. Pension contributions are still available to mitigate some of the Corporation Tax.
Others may see this as a warning shot across the bow and decide to sell up before the Chancellor comes back for seconds – and a potential dismantling of Entrepreneur’s Relief.
At Foresight, we have strategic partnerships with experts who can make sure you receive the right advice for your situation. If you would like further advice around your tax planning, please call us and one of our Wealth Strategists will be pleased to speak with you.