2023 is set to be a testing time for independent practitioners’ finances following Chancellor Jeremy Hunt’s Autumn Statement. Partner, Richard Norbury, sets out what is waiting in the wings and suggests some useful action points for you to take now to limit the damage.
There has been a mixed response to the Chancellor’s changes, but many professional commentators highlight that further tax measures and spending cuts may be announced after the 2024 General Election, regardless of which party comes to power.
The term ‘fiscal drag’ has been used by professional commentators to highlight that although basic and higher rates of tax have remained unchanged, it will, in a period of inflation, bring more individuals into paying higher rates of tax.
Rates of tax remain unchanged, excepting that the additional-rate threshold will decrease from £150,000 to £125,140 from April 2023.
The thresholds will remain unchanged until 2028. The total exposure is an additional 5% on income between these bands, meaning a total additional tax liability of £1,243.
At the time of writing, the reduction in the bands will not apply in Scotland and it will be up to the Scottish Government to decide whether to follow suit.
This change will bring more taxpayers into the ‘additional rate’ band. Higher-rate taxpayers currently have the benefit of up to £500 as a tax-free allowance on interest, while additional-rate taxpayers lose this allowance and pay tax on all interest.
The tax-free dividend allowance of £2,000 will be reduced to £1,000 from April 2023, dropping further to £500 from April 2024, and the increase of 1.25% that applied to dividend tax rates will no longer be an additional tax rate from April 2023.
These changes, as well as the additional-rate band change, give an opportunity for dividend tax planning for those operating their private practice via a limited company.
Inheritance tax thresholds remain unchanged to 2028, but the capital gains tax annual exemption of £12,300 – that is to say, the first £12,300 of any capital gain is free of tax – reduces in April 2023 to £6,000 and then to £3,000 from April 2024.
Again, this offers planning opportunities.
Anyone with investments or property held personally or perhaps in the process of liquidating a company may want to take advantage of the higher allowance in 2022-23.
The reversal of the additional 1.25% on National Insurance announced by the previous Chancellor Kwasi Kwarteng in his mini-Budget remains, so employer and employee National Insurance will be reduced.
For self-employed profits, the rates for 2022-23 have been altered to 9.73% on earnings between £11,909 and £50,270, and 2.73% on profits over £50,270.
The somewhat odd percentage is to account for the fact that the 1.25% levy was a short-lived affair and only for part of the tax year. From April 2023, the more familiar rates of 9% and 2% will return.
The planned rise in corporation tax from April 2023 will remain, meaning that the small company rate of 19% only applies to profits up to £50,000.
It then increases for profits earned over this amount to either 26.5% (marginal rate profits between £50,001 to £250,000) or 25% (main rate profits over £250,000).
The introduction of the higher rates of corporation tax means private limited companies should review their strategy and plan how to take money from the company. For example, it may be more advantageous to pay salaries from the company.
The timing of capital expenditure can be important. If a company is considering investing in expensive equipment or an electric car, from a tax perspective, a delay to April 2023 might result in more tax relief depending on the circumstances.
However, due to the super-deduction on qualifying assets purchased up to 31 March 2023 giving relief at 130%, then there are circumstances when bringing forward a capital purchase would bring about more tax relief.
Reviewing your affairs with a specialist medical accountant will ensure that you are working in the most tax-efficient way.
If profits in a limited company are likely to be lower going
forward – for example, if a doctor is winding down private practice prior to retirement – then consider a change of year-end at Companies House, which may mean ‘locking in’ more profits at the lower rate of 19%.
This would only work in specific circumstances and is a decision not to be taken lightly.
The introduction of the higher rate of corporation tax means that investment companies will pay more corporation tax.
Also, associated company rules will be introduced which can impact on anyone with more than one company, meaning the bands of £50,000 and £250,000 are shared between the companies, leading to the potential of higher rates of tax.
There may be instances where consultants and their spouse/partner run two completely separate private clinics via the same limited company.
At the time of incorporation, this may have made sense due to economies of scale. Separate companies should now be reconsidered, provided they are not caught by the ‘associated company rules’ as explained earlier.
A full review of the associated company position is recommended.
From April 2025, vehicle excise duty on electric cars will apply and the benefit-in-kind tax rate will increase by 1% a year until it reaches 5% in April 2027. This applies to anyone who has taken advantage of the lower rates either via a limited company or the NHS fleet scheme.
This at least gives some clarity on the plan and confirms that the rates will remain at 2% until the tax year 2024-25.
Electric cars may well still be a tax-efficient strategy and fund a vehicle that otherwise would be paid from your post-tax earnings.
Once again, despite detailed lobbying and tentative promises, nothing has changed relating to both the annual allowance and lifetime allowance tax rules on pensions.
The annual allowance tax charge lobbying would appear to have more success in that certain technical changes could benefit individuals this year who would have suffered due to the Consumer Price Index for September 2022 being 10.1%, although these measures would mainly benefit GPs.
The BMA has published details of the above and circulated them to members recently and more information is awaited.
Written for the Independent Practitioner Today, December / January Issue.