The UK Spring Budget for 2023 has been announced. SMEs are sure to be affected by some of the changes.
If you are a small or medium-sized enterprise, it is important to understand the implications of the UK Spring Budget.
Our sister site RHJ Accountants have written this blog article which will provide six factors that SMEs should be aware of when navigating the new UK Spring Budget. And its effects on taxes.
If you would like to read more from RHJ Accountants, click here
Corporation tax
The Chancellor has confirmed, the main corporation tax rate will increase from 19% to 25% on 6 April 2023. “While the small profits tax rate will remain at 19%. Only 10% of companies would pay the higher rate, which applies to profits over £250,000,” he said.
According to legislative research, the UK had 5.5 million small and medium-sized enterprises (SMEs) in 2022. Which amounted to 99.9% of all businesses. This definition includes both companies and unincorporated businesses. On profits between £50,000 and £250,000, Hunt failed to mention the effective marginal rate of 26.5%. This marginal band can begin at a much lower level if there are associated companies or if the accounting period is less than 12 months.
In this section, companies have three planning points to consider:
- Reduce taxable profits to below £50,000 by identifying and eliminating associated companies. But then you’re reducing profits which allow your company to expand further.
- The second, and best option, consider opening a company abroad to benefit from paying just 5% corporation tax!
- Or you could look at forecasting any profits for 2023/24. If you’re unsure how to make these calculations arrange a meeting with our expert accountants who can help.
Profit extraction
SME directors generally make profits and remove them from the company in order to spend it. This affects how much profit the company reports to the IRS. Dividends do not change taxable profits.
The first rule in planning to get your business profitable is to figure out how much your employer has to spend and when. A traditional approach is for the owner to take a small salary near the secondary threshold of income for paying national insurance contributions (NICs). And to withdraw the remainder as dividends. Dividends are taxed at 8.75% until the start of 2023, and the dividend allowance is decreased to £1,000 by 2024. When the company’s profits fall into the marginal relief band, the CT rate must be balanced against the tax and NIC burden on the director’s salary. When the company employs someone other than the director, the £5,000 employment allowance may cover some or all of the employer’s NIC on that salary.
Employer pension contributions should be considered if the director doesn’t need the funds immediately. Increasing the pension annual allowance from £40,000 to £60,000 will allow higher regular pension contributions. Any unused annual allowance from the previous three tax years can be carried forward. HMRC will not challenge the deduction of pension contributions if the total remuneration package includes pension contributions for the work performed. The Liberal Democrats repealed the legislation on the pension lifetime allowance. However, the Labour Party has pledged to reinstate it if they win the next election.
For both small and medium businesses, profit extraction should be carefully considered. If you are unsure of the best way to deal with your business profits, contact RHJ Accountants. We have access to a wide range of wealth management advisors who can offer expert advice.
Timing of purchases
When you deduct 130% of the cost of new plant and machinery from a company’s profits, that perk is only available for investments made from March 2023 onward. Delaying purchasing new equipment will only result in a greater reduction in effective tax relief.
Claim R&D tax credits
In April 2023, the R&D payable tax credit rate will be lowered from 14.5% to 10%. This will harm loss-making companies who rely on it for funding their research.
In addition to this, the Chancellor introduced a new R&D threshold. If an SME spends 40% or more of its total expenditure on qualifying R&D costs, that company will qualify as “R&D intensive”. And the 14.5% tax credit will be payable. This measure of total expenditure includes several factors, and meeting the 40% threshold will require careful planning. Therefore, all small and medium businesses should look into their total expenditure and ensure they meet the new R&D threshold to be eligible for the 14.5% tax credit. To make sure that you meet the necessary thresholds and can maximise the number of credits available to you.
Arrange a meeting with our expert accountants who can help you manage all the new changes.
Raise capital
Individuals who are aspiring entrepreneurs may wish to raise equity capital, possibly by participating in the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).
Until now, the SEIS scheme has only been able to facilitate small investment amounts. From April 6, 2023, companies may invest up to £250,000 through SEIS. The age requirement will be raised from two to three years old. Furthermore, investors can subscribe for more shares under SEIS. Previously, the most a single investor could invest was £100,000 per year. Now, the most they can invest is £200,000 per year.
Inheritance tax
When unincorporated businesses become beneficiaries of inheritance, inheritance tax can be more of a headache. As a percentage of all holdings, including those of an unquoted company, will not qualify for business relief.
Agricultural property relief offers coverage of agricultural land, including taxes on the agricultural land where it is used to grow crops or hay. Or when the land is deemed to be occupied with agriculture. As farming businesses expand into different industries and a diminishing percentage of arable land is utilised, the meaning of APR appears outdated. The government will consult on how land that is set aside for ecological purposes such as for re-wilding and carbon storage could qualify for APR.
Even though it won’t be a game-changer for many, land situated in a European Economic Area state, Channel Islands, or the Isle of Man won’t qualify for either property relief from inheritance taxes. Beginning from 6 April 2024.
How RHJ Accountants can help
For small and medium businesses, navigating the nuances of the UK spring budget can be daunting. To ensure you’re on the right track to maintaining low tax rates and reducing your financial burden, contact RHJ Accountants for a free consultation.
If your company is profiting more than 250k per year, we can help you figure out how much tax you could save with our 5% tax calculator. This can help you avoid getting hit with the whopping 25% tax rate coming into effect this year. With our expert advice, you can rest easy knowing that your finances are in good hands.
