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Tax efficiencies in 2023/2024 – what contractors need to know

How a proactive approach to tax planning can help you

It’s always been the case that self-employed individuals need to understand the rules around tax to stay compliant with HMRC, but with 2023 well under way and a cost of living crisis to contend with, it’s never been more important to be aware of the opportunities to operate in the most tax efficient way.

To minimise the impact of things like tax increases and keep on track with reaching business and personal financial goals, Joanne Thorne, Technical Compliance Manager at SJD Accountancy, is advising all self-employed workers to take a proactive approach to tax planning.

Following announcements in the Chancellor’s Autumn Statement last year that confirmed a number of tax changes – all of which have been described as being crucial to helping plug the gap in the country’s finances – self-employed workers need to be clear on what the changes mean for them. None of these were reversed in the latest Spring Budget, so it’s vital to have a good grasp of what the changes mean in real terms from April.

Here, Joanne explains the main tax changes the self-employed community should be aware of from the start of the 2023/24 tax year:


Plan Ahead

Keeping an eye on your financials as you go, will help you to ensure that you are working efficiently, and gives you time to plan and make changes as you go. Having an idea of what tax liabilities will be due at the end of the year, means that you can put money aside, and reduce the likelihood of surprises later on. This is especially important given the changes brought in for the coming years.


Changes to Corporation Tax

Affecting those with a limited company, the increase to Corporation Tax will take effect from April 2023, seeing the main tax rate rise from 19 – 25%. However, it’s important to note that the rate will differ according to the individual company’s profit for that tax year.

While the full 25% rate will only apply to businesses with qualifying profit over £250,000, the rate for small businesses with a qualifying annual profit of £50,000 and less will remain at 19%.

For those small businesses who have profits higher than £50,000 (lower limit) and £250,000 (upper limit), the government has introduced Marginal Relief, providing a seemingly gradual increase in The Corporation Tax rate between the small profits rate (19%) and the main rate (25%) from April 2023 to help lessen the impact on smaller businesses.

The reality is however, that profit over £50k and less than £250k will actually be taxed at a marginal rate of 26.5%, which aims to bring the overall profit in line with the 25% rate.

For example, for a company whose annual profit is £80,000, the Corporation Tax liability at a rate of 19% would be £15,200 for the tax year 2022/23.

From April 2023, the 19% rate only applies to the first £50,000 of profits, while the remaining £30,000 will be taxed at a rate of 26.5% as the profit falls between the upper and lower thresholds. Therefore, from April 2023, in this example the Corporation Tax liability will rise by £2,250, requiring the business owner to pay a total of £17,450.

In addition, if you have more than one company, and it meets HMRCs’ ‘associated company’ rules, then the profit levels are split across the companies, meaning that you could pay tax at a higher rate much earlier. Two associated companies, for example, will see a higher rate of tax being charged once they exceed £25k of qualifying profits in each company, rather than the £50k if they had only one.


Dividend tax changes

Having already increased the dividend tax rates by 1.25% for both basic rate and higher tax payers in 2021/2022, from April 2023, there will also a be a reduction of the dividend allowance. The current tax-free allowance sits at £2,000, but the threshold is set to be halved to £1,000 from 6th April 2023, followed by a further decrease to £500, effective from April 2024.

If you haven’t already utilised your £2k tax free allowance, then now may be the time to do so.


Income Tax Relief

It’s also worth self-employed workers understanding the announcements around Income Tax that were made by the Chancellor towards the end of last year.

As expected, the rate of income tax was not raised, but it was instead confirmed that these rates would be frozen. We’re currently in the middle of a previously announced four-year freeze on those rates, but it was announced that this would be extended for a further two years until April 2028.

This applies to the current personal tax allowance of £12,570, and the higher rate income tax threshold of £50,270. The Chancellor also lowered the £150,000 threshold at which taxpayers start paying the additional rate of income tax (45%) to £125,140.

In conjunction with this, the National Insurance contributions upper earnings and profits limit, which were aligned to the higher rate income tax threshold, will also remain frozen until April 2028.

So, despite the obvious positive that the income tax rates were not increased, those fortunate enough to earn more income over the coming years – which should help to cover the rising cost of living – could find themselves being taxed sooner and at a higher rate.


VAT threshold frozen

Another announcement from the Autumn Budget was around VAT, when the Chancellor confirmed that the VAT registration threshold of £85,000 would be maintained for a further two years until 1 April 2026.

This means that those increasing prices to cover the additional cost of materials and services that they are being charged, may find themselves having to register for VAT much sooner than expected.


The importance of tax relief

Tax relief is obtained when qualifying expenditure is put through a business, or claimed personally with HMRC, as it reduces the profit/income figure on which tax is calculated. Less profit or income equals less tax to pay.

As business owners will already know, they can claim tax relief across a number of business expenses, including uniforms, stationery, tools and equipment or vehicles, travel costs (fuel, parking, public transport etc.), stock, costs of advertising or marketing and training courses.

The best way to get the maximum out of tax relief from day-to-day business expenses is to regularly review your list of expenses and make sure you include everything that is business-related. If you’re self-employed, you may be able to get tax relief on business running costs (for example, claiming back a portion of your utilities or internet bills) as well as office costs (like stationary or phone bills).

While tax-deductible expenditure is a positive in terms of tax relief, remember that the expenditure is still an outgoing of your business initially. It is always good to review whether you can and should reduce what you are spending from your business. Even if your business is not struggling, less expenditure can still represent more money back in your own pocket.


Changes to pension contributions

Personal and company pension contributions also count as tax relief too, and in the Spring Budget the Chancellor announced that from 6 April 2023, the standard annual allowance will increase from £40,000 to £60,000, and the lifetime allowance charge will be removed.

Pensions are one of the few remaining tax-deductible benefits for the self-employed, and can provide both tax relief initially, while increasing savings for the future. Company pension contributions get tax relief directly through the company, and could be a useful strategy to employ, especially given that the corporation tax paid will be based purely on the profit for the year, and company contributions can reduce this. Personal contributions receive the tax relief by effectively increasing the amount of money that you can earn, before you pay tax. For some, however, locking money away for the longer term, may not be as attractive a strategy as it once was, as many may prefer, or need the quick access to cash, given today’s current economic climate. The latest changes to the annual allowance and lifetime allowance are aimed at making pension contributions more attractive and encouraging people to work longer, but speaking with a financial or pension advisor could help you to understand your options better.


Tax planning for the future

After a turbulent few years for the self-employed community and multiple changes to how they are required to run their businesses, there’s never been a more important time to understand how you can be as tax efficient as possible.

From checking you are using the right tax code to considering adding more money to your personal pension, there are multiple ways to minimise your tax bill and increase business revenue. To help ensure your tax affairs are fully compliant, it’s advisable to engage with a qualified accountant who can help you develop a more efficient way of organising your tax affairs to maintain your financial confidence and help plan for the future.

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