29 Mar 2023
1. Pensions tax changes
The 2023 Spring Budget abolishes the lifetime allowance charge from 6 April 2023. Prior to this date, on crystallisation of an individual’s pension, any excess fund value over £1,073,100 would be subject to a lifetime allowance charge at 55% if the fund were to be withdrawn as a lump sum, or 25% if it were to be taken as an annuity. From 6 April 2023, all pension funds not withdrawn as a tax-free lump sum will be taxed at the individual’s marginal rate of tax when the benefits are paid.
The Budget introduces a cap on the amount of the tax-free lump sum that an individual can take when they first access their pension. An individual will still be entitled to take up to 25% of their pension fund value as a tax-free lump sum, but from 6 April 2023, the maximum tax-free lump sum permitted will be set at £268,275.
From 6 April 2023, the pensions annual allowance will also increase from £40,000 to £60,000 and the money purchase annual allowance will increase from £4,000 to £10,000. The annual allowance taper threshold will also increase from £240,000 to £260,000.
These measures are intended to discourage highly skilled workers such as doctors from retiring early before their pension funds trigger tax charges. If you can identify clients in this bracket, prompting them to discuss their position with their IFA may be worthwhile.
Similarly, identifying clients with whom additional tax planning is possible, with the increased Annual Allowance, would be a good course of action.
2. Basis periods changing for unincorporated businesses
We had been hoping that the delay in Making Tax Digital for Income Tax would also mean a delay in the reforms to the basis period rules. The Spring Budget did not deliver in this regard, so the reforms will be going ahead.
Under the new rules, businesses can still choose their accounting year-end, but profits must be reported to HMRC on an ‘arising’, or tax-year, basis. For those with non-31 March/5 April year ends, time apportionment will be required, and, for some, it will make sense to simply change their year-end to 31 March/5 April. Whether by transitioning to the new basis period rules or by changing year end in 2023/24, it will mean reporting profits or losses for more than 12 months and then deducting any overlap relief available. For 2023/24 only, there is the ability to spread ‘excess profits’ (namely any accelerated profits less overlap relief deducted) over five years, starting with the first component coming into charge in 2023/24.
Rebecca Bennyworth tells us more and goes through some worked examples in this webinar.
3. Capital Allowances – Full Expensing
In his speech, the Chancellor announced “full expensing” to big fanfare, but this capital allowances measure is of limited relevance to most businesses. The policy gives companies a 100% first-year allowance (FYA) on new, eligible main rate plant and machinery acquisitions. An equivalent FYA for special rate acquisitions is set at 50%. The legislation will ensure that, in all cases, once an FYA has been claimed, any future disposal proceeds give rise to immediate balancing charges (at 100% of the proceeds for main pool expenditure and 50% of the proceeds for special rate expenditure).
Most plant and machinery, including special rate expenditure, qualifies for the Annual Investment Allowance (AIA) and this means that the new FYAs will likely only be used by companies spending more than their Annual Investment Allowance (AIA). The AIA is now permanently set at £1million but, of course, needs to be shared between companies in the same Companies Act group or by businesses that are otherwise related and under common control.
The full expensing policy will replace the 130% super-deduction, which comes to an end on 31 March 2023.
4. Corporation tax rate
The Spring Budget 2023 confirmed that we are going to see the planned increase in the main rate of corporation tax on 1 April 2023 and that the same rates and thresholds would be used in the financial year from 1 April 2024 to 31 March 2025 as well.
The new 25% main rate will apply to companies with profits over £250,00 a year, with the 19% small companies rate applying to companies with profits below £50,000 a year. For companies with profits between £50,000 and £250,000 marginal relief applies, which means that the overall rate for these companies will be somewhere between 19% and 25%.
Companies in the same corporate group (or otherwise connected by association) must share the £50,000 and £250,000 thresholds between them, making the 25% rate more likely to apply.
Rebecca Bennyworth will remind us of the new corporation tax regime, and all things associated company, in this upcoming webinar.
5. Research & Development
It was no surprise that the Budget included changes to the enhanced corporation tax relief schemes for expenditure on qualifying research and development (R&D) activities. In recent months we have seen R&D become a focus point for HMRC enforcement and awareness campaigns. It was good news that the RDEC scheme credit (for non-SMEs) will be increased from 13% to 20%, but the SME scheme will see its expenditure enhancement rate cut from 230% to 186% and its payable credit rate, for loss-making companies, cut from 14.5% to 10%*.
* In new news, ‘research intensive’ companies i.e. those whose R&D expenditure makes up at least 40% of their total expenditure will still be able to obtain R&D payable credits of up to 14.5%.
All of these changes will apply to R&D expenditure incurred on or after 1 April 2023.
A range of other measures will also start to apply from 1 April 2023, including enhancements to claim submission requirements, as described by Sharon Cooke in our Budget webinar.
6. Capital Gains Tax for separating/divorcing couples
Currently, if spouses or civil partners separate, assets can be transferred from one to the other on a no gain/no loss (NGNL) basis for the remainder of the tax year in which the separation occurs. The NGNL treatment ensures that gains or losses on the transfer are deferred until the asset is disposed of by the recipient spouse or civil partner.
In response to recommendations made by the Office of Tax Simplification, new measures will apply to transfers on or after 6 April 2023 that secure the NGNL treatment as long as the transfer takes place within three years after the year in which the couple ceases to live together. The NGNL treatment will also apply to assets that separating spouses or civil partners transfer between themselves as part of a formal divorce agreement, regardless of the time that has passed since separation.
In conclusion – there is a lot to talk to clients about and whether you do this by newsletter, email alert or one to one conversation, it is important to identify those clients most affected by Budget changes and other changes taking effect from 1/6 April 2023.
Our full Budget webinar can be booked here and is free to 20:20 Innovation members.
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