7 things you must know about the new tax year

With the start of a new financial year, it is critical to be aware of the tax changes that have been introduced from April. Read our guide to UK tax rates and thresholds for sole traders, limited companies, partners and partnerships, employers, and other businesses.

Many businesses will face an increasing tax burden in 2022/23 owing to the freezing of many tax allowances and tax hikes on dividend income and National Insurance charges as part of the new Health and Social Care Levy. The levy is intended to boost NHS and social care funding.

Both National Insurance and dividend rates have increased by 1.25% from April 2022. To help you keep track we have listed below a handy summary of key changes to be aware of:

  1. National Insurance rates – increase in rates of 1.25% but the threshold at which you start to pay National Insurance will rise

  2. National Minimum Wage – increase from April 2022

  3. Income tax – the personal allowance remains frozen

  4. Dividend rates – an increase of 1.25% from April

  5. Corporation tax – be aware of future increases

  6. Other taxes – rates remain largely frozen

Here's each area in more detail and how the changes will impact your business:

1. National Insurance rates National Insurance rates rose by 1.25% from April 2022 in order to pay for the Government’s new Health and Social Care Levy. From April 2023, the levy will show as a separate deduction but will initially be funded through the National Insurance increase.

The new Health and Social Care Levy will apply to both employees and employers liable for Class 1 National Insurance as well as to self-employed individuals on their Class 4 National Insurance charges.


Will I pay different types of NI?

You might pay more than one type (or class) of National Insurance in the same tax year. This can happen if you work for someone as an employee, as well as earning your own self-employed income, for example. It can also happen if you’re an employer and an employee but there are other reasons too.


How much National Insurance will I pay?

The rate of NI that you pay depends on which Class you must make contributions for. Just to make it really confusing, different classes of NI each have their own thresholds and charge NI at different rates. It can be quite confusing, so do ask for help and we can best assist you.


Below shows the rates and thresholds for each class of National Insurance for employers, employees, and the self-employed.

  • Class 1 (primary) National Insurance. Paid by employees on the wages they earn working for someone else.

  • Class 1 (secondary) NI. Paid by employers, who make NI contributions towards their employees’ NI.

  • Class 1A or 1B National Insurance. Some employers might also need to make NI contributions on the equivalent financial value if they provide any work benefits (sometimes known as Benefits in Kind, or BiKs) to employees.

  • Class 2 NI. Self-employed people pay Class 2 NI on what they earn through their business activities.

  • Class 3 NI. These are voluntary contributions that you can make if you need to top up the amount you have paid in a tax year.

  • Class 4 NI. Depending on how much they earn, self-employed people might also pay Class 4 NI on their business activities.

From April 2022 there will be a temporary increase to the rate of Class 1 and Class 4 NI, though these rates will return to normal the following year. This is because of the new Health and Social Care Levy.

Employee main/higher rate

Employer rate

NIC rate for 2021/22

12%/2%

13.8%

NIC rate for 2022/23

13.25%/3.25%

15.05%

Where an individual earns above what is known as the Secondary Threshold, the business must start paying employer contributions, using the above rates.


Where an individual earns above what is known as the Primary Threshold, they have to start paying employee contributions, using the above rates.


The Government also announced it will increase both the Primary Threshold and Lower Profits Limit of National Insurance to bring them in line with the income tax personal allowance of £12,570. However, the way this will be introduced, depends on your individual circumstances.


Employees

For an employee, between 6th April and 5th July 2022, they will be able to earn £190 a week without paying Class 1 National Insurance. Then, between 6th July 2022 and 5th April 2023, this weekly threshold will increase to £242.



Directors

Directors of limited companies will be treated differently as they pay National Insurance on an annual basis. For 2022-23, a director will be able to earn £11,908 before paying Class 1 National Insurance. This provides for 13 weeks of £9,880 and 39 weeks of £12,570. That means the benefit directors will receive will be in line with employees.


Self-Employed

Self employed main/higher rate

NIC rate for 2021/22

9%/2%

NIC rate for 2022/23

10.25%/3.25%

Self-employed also pay National Insurance on an annual basis and for the 2022-23 tax year, will be able to earn £11,908 before paying Class 4 National Insurance.


How will this affect your business?

The changes are fairly complex and employers need to make sure they have included these increases to their payroll costs.


Directors need to be mindful of these changes when planning their profit extraction and make full use of any reliefs to mitigate charges where possible. The Chancellor also announced that the employment allowance would increase to £5,000 from April 2022, (from £4,000 for 2021/22). A company can reduce its employer Class 1 National Insurance contributions by a certain amount each tax year (where eligible) and this should be factored into salary extraction planning.

2. Income tax in 2022/23 Most taxpayers get a personal allowance of £12,570. This allowance is taken from your income and the balance of your non savings income will then subject to tax. For taxpayers who earn more than £100,000, their personal allowance is reduced by £1 for every £2 earned over £100,000.

For the tax year ending 5th April 2023, the personal income tax threshold of £12,570 is frozen and the various bands of income tax also remain frozen:

BAND

TAXABLE INCOME

TAX RATE

BASIC

£12,570 TO £50,270

20%

HIGHER

​£50,271 TO £150,000

40%

ADDITIONAL

Over £150,000

45%

How will this affect your business?

Where your income exceeds £150,000, you start to pay the additional rate of income tax, which is 45%. Where your income is between £100,000 and £125,140, you are subject to an effective ‘super rate’ of tax rate of around 60%. This is because, after your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 you go over the £100,000 tax bracket.


You may be able to reduce your tax exposure with some tax planning techniques, which can include making personal pension contributions or charitable donations.


For basic rate taxpayer, they may be able to transfer some of their unused personal allowance to their spouse or civil partner if neither is a higher rate taxpayer and they are not using all their allowance.


The allowances for savings interest income are also frozen in 2022/23.


To find our more about our complete managed payroll service click below:




3. National Minimum Wage From Friday 1st April 2022, the National Minimum Wage increases as follows:

​From April 2022

April 2021-March 2022

Increase

National Living Wage

£9.50

£8.91

6.6%

21-22 years rate

£9.18

£8.36

9.8%

18-20 years rate

£6.83

​£6.56

4.1%

16-17 years rate

£4.81

£4.62

4.1%

Apprentice

£4.81

£4.30

11.9%

How will this affect your business? Businesses need to make sure they pay workers at the correct rate. Failure to do so could result in damage to your reputation and criminal prosecution in extreme cases.


4. Corporation tax

Corporation tax remains at 19% in 2022/23 but be aware of proposed future increases, so you can start planning for this now.


The Super Deduction Relief for Capital Expenditure is due to end on 31st March 2023, so business should carefully consider their options when planning future capital investment.


How will this affect your business?

While the rate of corporation tax of 19% remains the same in 2022/23, from April 2023, the rate for companies with profits over £250,000 will increase to 25%.


The Government will also bring in a new small profits rate, which means companies with profits of £50,000 or less can continue to pay corporation tax at the 19% rate. There will be tapered rates for those with profits between £50,000 and £250,000.


Company owners should also be aware that these upper and lower limits are reduced where there are what are called associated companies. Where companies are associated, for example, two companies under common ownership, the profit limits are divided among the associated companies and these revised limits are then used in the marginal relief calculation.


Not only should businesses be looking at the impact of these significant tax increases, but also considering their corporate structure to determine the impact on their marginal relief calculation.


If you need help with tax, please get in touch for a chat about how we can help:



5. Dividend rates The rates of tax an individual pays on dividend income have been steady since 2016, but in 2022/23, they increase by 1.25 percentage points due to the new Health and Social Care Levy.

In 2022/23, the dividend allowance is £2,000. Any dividend income within the dividend allowance is taxed at a special rate of 0%. Beyond that, the rates of tax you pay on dividend income will be increased by 1.25% as follows:

2021/2022

2022/2023

BASIC

7.5%

8.75%

HIGHER

32.5%

33.75%

ADDITIONAL

38.1%

39.35%

How will this affect my business? For a company director, this 1.25% increase is important to factor into your remuneration planning if you decide to extract profit from your limited company.

Not only will you need to factor in the additional tax but also you should be mindful of the cashflow impact on payments on account, which are payable as part of the self-assessment personal tax system.

6. Other taxes As announced in the spring budget, due to the impact of Covid-19, the Chancellor announced a broad freeze of tax thresholds and allowances until 2026:

  • The Annual Exempt Amount for Capital Gains Tax (frozen at £12,300)

  • The lifetime pension allowance (frozen at £1,073,100)

  • The pension annual allowance (frozen at £40,000)

  • The inheritance tax (IHT) threshold (frozen at £325,000)

  • The IHT residence nil rate band (frozen at £175,000)


How will this affect my business? When tax allowances and bands are frozen, this is often referred to as a ‘stealth tax’ because more people will fall within the scope of tax as inflation bites and pushes them into higher bands. Although the move prevented an immediate rise in tax, these frozen rates will impact your business and personal finances over the longer term.

You should factor this into your business plan and consider reviewing your personal circumstances, so you are prepared for these increases and are as tax efficient as possible.

7. How can Purple Accounts help you? Spending a little time now to look ahead at 2023 and beyond will mean you will have a comprehensive plan in place for the coming months. It will take a bit of pressure off and you'll have peace of mind, knowing you're not alone to manage this yourself.


If you need any help or advice with the financial aspects of running your business or your own personal tax affairs, please get in touch today on:


01925 979500 or email enquiries@purpleaccounts.com