The latest 2023 Budget report from the Chancellor has been announced, and while it will take us a few days to work through the details, here are a few of the key takeaways.

The highlights are:

• Subsidised childcare
• Reduced dividend allowance
• Reduced additional rate threshold
• Reduced Capital Gains allowance
• Increased annual Pension contribution allowance
• Removal of Pension Lifetime contribution allowance
• Increased corporation tax rate
• Changes to R&D calculations

Here’s some more information on the changes.

Subsidised Childcare

Perhaps the most significant announcement is that working parents will receive free or subsidised childcare. This could prove valuable for employers looking to retain and recruit employees.

This change will be introduced gradually, with working parents of two-year-olds receiving 15 hours of free care from April 2024, children from nine months receiving 15 hours free childcare from September 2024, and all eligible under-5s receiving 30 hours free childcare from September 2025.

To qualify for this childcare provision, all adults in the household must be working at least 16 hours per week, and neither of the adults’ individual income can exceed £100,000.

Tax Rates, Thresholds and Allowances

As already announced, the tax-free dividend allowance is dropping from £2,000 to £1,000 per year

The annual Capital Gains allowance will also drop to £6,000 (from £12,300) for 2023/24 and then again to £3,000 for 2024/25

Income tax thresholds have been frozen which, because of inflation, will effectively mean an income tax increase for many.

The additional rate threshold of 45% however will drop from £150,000 to £125,140.

If you earn over the basic rate tax threshold and are the owner of a company making more than £50k in profit a year, then it’s worth reviewing the salary that you are taking from the company. The typical low-salary, high-dividend mix may no longer be the most tax-efficient solution for you.

Pension Reform

Starting April 6th, 2023, the annual allowance for pension contributions will increase from £40,000 to £60,000. This gives business owners a great opportunity to increase their retirement savings while also benefiting from an increased Corporation Tax saving.

The limit on the amount that can be contributed to your pension, known as the lifetime allowance (LTA), will no longer apply. Starting in April 2023, the LTA tax charge will be abolished, and the LTA itself will be discontinued from April 2024.

The current Pension Commencement Lump Sum (tax-free lump sum) of £268,275, however, will remain unchanged and will be frozen at this level.

Corporation Tax and Capital allowances

As planned, Corporation Tax will increase to 25% from April 2023 for companies with profits over £250,000. Companies with profits between £50,000 and £250,000 will however pay a hybrid rate, and those with profits under £50,000 will continue to pay Corporation Tax at 19%.

Additionally, the government has introduced a new policy called “full expensing”. This policy will allow companies to write off the full cost of qualifying assets, providing immediate tax relief on infrastructure investments. This will be in effect for a three-year period from 1 April 2023 to 31 March 2026 and will replace the super deduction capital allowance scheme.

The Annual Investment Allowance (AIA) will remain at £1 million, which can be used to accelerate tax relief for special rate assets that are not covered by the new full expensing. Choosing to utilise the AIA before the 50% first-year allowance on special rate assets will ensure that businesses achieve the maximum and quickest tax relief.

Changes to the calculation of R&D tax credits

From 1 April 2023, the credit for R&D expenditures, such as salaries, subcontractors, and software, will have reduced rates. The 130% extra deduction businesses currently receive will be reduced to 86%, and the R&D tax credit will decrease from 14.5% to 10% for small businesses. However, loss-making companies that spend at least 40% of their total expenditure on R&D will be able to claim a higher payable credit rate of 14.5%.

The restrictions on overseas expenditure for R&D will come into effect from 1 April 2024, instead of 1 April 2023, and the government is continuing to review the R&D schemes, with the possibility of implementing a merged scheme from April 2024 to simplify relief.

If you’d like to read the full budget briefing, you can find it on HMRC’s website here.

If you would like our help in understanding how this budget will impact you and your company, get in touch.