UK Accountants brace for significant tax changes in 2024

As the 2023/2024 financial year is underway, accountants in the UK are bracing themselves for significant tax changes that will come into effect this year.

These changes will have a profound impact on businesses and individuals alike, requiring careful planning and preparation. In this article, we will explore the key factors that accountants should consider and provide insights into how to navigate these changes effectively.

Changes to Tax Rates

One of the notable changes in the upcoming tax year is the adjustment to tax rates.

While the basic rate of Income Tax will remain at 20%, the higher rate and additional income tax thresholds was lowered from April 2023. The top band for high-rate taxpayers will fall from £150,000 to £125,140, and for additional rate taxpayers, income tax will be paid on earnings above £125,140 instead of £150,000. This change means that approximately 232,000 more people will fall into the additional rate tax bracket.

Another significant change is the introduction of a new regime called ‘full expensing’ to replace the super-deduction legacy. This new regime will allow businesses to claim 100% capital allowance on qualifying expenditure until 31 March 2026. This extension aims to encourage business investment and stimulate economic growth.

Furthermore, the government plans to increase the rate of R&D relief for eligible companies from April 1, 2023. This change will enable companies to claim a repayment of almost 27% on qualifying R&D expenditure, a significant increase from the previously announced rate of 18.6%.

Dividend Allowance Reduction

In April last year, there was a reduction in the amount charged at the nil rate for dividends. The Dividend Allowance decreased from £2,000 to £1,000, and then further to £500 from April 2024. This reduction is estimated to impact approximately 3,235,000 individuals.

The rate of Income Tax applicable to dividend income was already changed in April 2022, resulting in higher tax rates for dividends. This change has made traditional extraction routes for owner-managed businesses more expensive. As a result, it is crucial for businesses to explore alternative avenues such as pension contributions, charitable donations, and ISAs to manage their tax liabilities.

Corporation Tax Changes

For corporations, the 2022/2023 financial year marked the last year of corporation tax rates residing only at 19%.From April 2023, the rate of 25% was introduced for profits exceeding £250,000, while profits between £50,000 and £250,000 will be taxed at a marginal rate of 26.5%. Business owners should review their plans for the year ahead to mitigate the effects of this increase.

Reviewing the legal structure of your business

Considering the legal structure of your business is a critical aspect of tax planning. It is essential to align the structure of your business with your long and short-term goals while taking into account factors beyond tax implications. Sole traders and partnerships may want to evaluate whether it is still appropriate to remain in their current structure or if incorporation would be more beneficial. Incorporation offers lower tax rates, but other factors such as personal circumstances, long-term goals, and commercial implications should also be considered.

When it comes to business exit planning, having a strategy in place is crucial to maximize proceeds or minimize tax liabilities. Business Asset Disposal Relief (BADR), formerly known as Entrepreneur’s Relief (ER), may still be available to provide tax advantages for business sales or dissolutions. It is important to plan remuneration ahead of a business exit to optimize the extraction at a lower tax rate¹.

Making Tax Digital (MTD) Compliance

Although the introduction of MTD for Income Tax Self-Assessment (ITSA) has been delayed until 2026, businesses should still prepare for this change. MTD for VAT has already been implemented, and business owners should be familiar with delivering VAT information in a compliant manner. Adapting to digital tax requirements is essential for businesses to ensure compliance and avoid penalties¹.

Ownership Structure and Pension Contributions

The ownership structure of a business can create opportunities for tax planning. For example, partnerships or joint ownership with a spouse can help allocate profits effectively and manage tax liabilities. Married couples can take advantage of joint ownership to utilize lower tax rate bands and retain personal allowances. Incorporating a business also offers flexibility in remuneration options, such as salary, dividends, interest, pension contributions, or a combination thereof.

Pension contributions can be an effective tool in managing tax positions, especially when higher tax rates apply. Contributions to pension schemes receive tax relief, allowing individuals to extend the band of income taxed at the basic rate. This can help retain personal allowances and reduce tax liabilities. Business owners can also make employer contributions to offset against company corporation tax¹.

Tax Implications for Unincorporated Businesses

Unincorporated businesses should assess the impact of future changes and plan accordingly. Staying informed about tax updates and understanding how they will affect the business is crucial. Accountants should work closely with business owners to provide guidance on tax planning strategies and ensure compliance with changing regulations¹.