The Office of Budget Responsibility predicted last October that the economy would return to pre-COVID levels by 2022, however, this was before the Omicron variant caused further disruption. With this in mind the government chose a package of tax measures to support a strong economy and as could be predicted, this includes tax rises.

The biggest change was the introduction of the 1.25% Health and Social Care Levy, initially this will be introduced as an increase in National Insurance contributions for employees, employers, and the self-employed. Alongside this is a 1.25% increase in dividend tax rates.

These two increases alone are expected to raise an additional £18.7 billion a year by 26/27.

In addition, from the 1st April 2023, corporation tax is set to increase to 25%.

Now is a good time to ensure you are making the most of the reliefs and allowances available in the current tax year.  The information below provides more information on what actions to take to improve your tax position before the end of the tax year.

Individuals

Income tax

• Personal allowance of £12,570
• Personal savings allowance: the first £1,000 for basic rate taxpayers, or £500 for higher rate taxpayers, or £0 for additional rate taxpayers of savings income is taxed at 0%
• Dividends: the first £2,000 of dividend income is taxed at 0%

The income tax personal allowance and higher rate threshold will remain frozen for English and Northern Irish taxpayers at £12,570 and £50,270 respectively until April 2026.

From the 6th April 2022, income tax applicable to dividends will increase to 8.75%, the dividend upper rate will increase to 33.75%, and the dividend additional rate and the dividend trust rate will be 39.35%. Dividend trust rate will also increase to 39.35%.

Capital gains tax planning

The annual exemption will remain at £12,300. Gains above this level are taxed at:

• 10% if the gain qualifies for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), up to a lifetime limit of £1 million
• 10% if the gains qualify for Investors’ Relief, up to a lifetime limit of £10 million
• 10% (18% for gains in respect of residential property or private equity carried interest) if the gains fall within the unused basic rate band
• 20% (28% on residential property or private equity carried interest) for gains above the basic rate band

Pensions

Contributions within the annual allowance and the overall lifetime limit of £1,073,100 attract relief at your marginal rate of tax.

Tax relief on contributions, tax-free growth within the fund, and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive savings vehicle.

The annual pension contributions limit of £40,000 is tapered by £1 for every £2 of income in excess of £240,000, reducing to a limit of £4,000 for those with income over £312,000. No tax relief is available for contributions in excess of the available annual allowance.

The annual allowance can be carried forward for three tax years.

If you are approaching retirement and are considering drawing benefits, take advice to ensure you understand the tax implications of accessing your pension fund.

Business Owners

Family businesses

Dividends are taxed at lower rates than employment income and do not attract NICs.

Dividends are not tax deductible for corporation tax purposes.

From the 6th April 2022, income tax on dividend income will increase by 1.25% making the dividend ordinary rate 8.75%, the dividend upper rate will be 33.75% and the dividend additional rate and the dividend trust rate will be 39.35%. The dividend trust rate will also increase to 39.35%.

If you are a shareholder, excess profits may be paid out as a dividend or a bonus. Bonuses are taxed at your marginal rate of tax, and will attract employee and employer NICs, which will also increase from the 6th April 2022. These will be deductible for corporation tax purposes.

Sole traders

Losses made by an unincorporated business in the accounting period ending in the 2021-22 tax year can be offset against your other income of that year and/or the previous three years (this is a temporary extension of two years to the usual 12-month period) subject to a maximum of £50,000 or 25% of your total income for the year.

The amount of trading losses that can be carried back to the preceding year remains unlimited but the total amount that can be carried back by a taxpayer to the extended period is capped at £2 million.

Unused losses can be carried forward against future profits of the same trade with no limit.

Capital expenditure

The ‘super-deduction’ allows companies within the charge to corporation tax to claim 130% relief on the acquisition of new plant and machinery. It applies to acquisitions made in the two-year period that began on 1 April 2021. Other expenditure eligible for capital allowances normally attracts an annual capital allowance of 18% or 6%, on a reducing balance basis.

The Annual Investment Allowance (AIA) provides 100% relief for expenditure on most types of plant and machinery, and many fixtures in buildings, capped at £1 million until the 31st March 2023.

A 50% first year allowance was introduced for qualifying ‘special rate’ assets acquired in the two-year period from the 1st April 2021.

Structures & Buildings Allowance can provide relief for expenditure on new non-residential buildings.  Relief is given at a flat rate over 33 and a third years at 3% per annum.

In addition, there are reliefs available for expenditure on qualifying Research and Development.

Businesses in Freeport tax sites are eligible for Enhanced Capital Allowances and Enhanced Structures & Building Allowance of 100% and 10% respectively.

Business Asset Disposal Relief (formerly Entrepreneurs Relief)

Business Asset Disposal Relief reduces the rate of CGT to 10% on qualifying business gains, up to a lifetime limit of £1 million.

The relief applies to the disposal of shares in a trading company providing that, during the period of two years immediately prior to the disposal:

• You are able to exercise at least 5% of the voting rights
• You own at least 5% of the ordinary share capital
• You are beneficially entitled to at least 5% of the profits available for distribution or 5% of the distributable assets on winding up, or, on a sale of the company, would receive at least 5% of the consideration as a result of holding the shares
• You are an officer or employee of the company

The relief can also apply to the disposal of a business or part of a business, and certain assets used in a business, although restrictions apply if:

• There is personal use of a business asset
• The asset was used in the business for only part of its ownership period
• You were not involved in the business throughout the ownership period
• The asset has been rented to the business

A separate relief called Investors’ Relief is similar to BADR.  This relief allows external investors to claim tax relief on their investment in qualifying shares of unlisted trading companies.

Employers

From the 6th April 2022, the new Health and Social Care Levy will be introduced, initially as a temporary increase in National Insurance rates. The levy will increase NICs by 1.25% for both employee and employer and will also apply to self-employed workers.

The employer NIC rate will be 15.05% and will apply equally to earnings, benefits in kind and PAYE Settlement Agreements.

From April 2023, the Health and Social Care Levy will be separated from the main NIC rates into a separate levy in its own right, this will mean it will be payable by pension age employees.

Cars and fuel

If you compensate your employees for using their own cars for business purposes, they can be paid a tax-free mileage allowance:

• 45p per mile for up to 10,000 business miles
• 25p per mile for each additional mile over 10,000
• 5p extra for each work passenger making the same trip

If employees use their own bicycle or motorcycle for business journeys, they can receive a tax-free mileage allowance of 20p per mile (bicycles) and 24p per mile (motorcycles).