The Spring Budget of 2023 introduced significant changes to the UK’s tax landscape. These changes include alterations to corporation tax rates, capital gains tax for separating and divorcing couples, research and development tax relief, and the lifetime allowance charge for pensions. These changes are set to affect individuals and businesses and it’s essential to understand their implications to prepare for the upcoming tax year. In this article, we will explore the four key tax changes in detail and provide insight into how they may impact you going forward.
Effective from 6th April 2023, the Spring Budget of 2023 has abolished the lifetime allowance charge. Before this date, any amount exceeding £1,073,100 would be charged at a rate of 55% if withdrawn as a lump sum, or 25% if withdrawn as an annuity. However, after 6th April 2023, all pension funds that are not withdrawn as tax-free lump sum will be taxed at the individual’s marginal rate of tax when the benefits are paid.
The latest budget has also set a limit on the amount of tax-free lump sum that can be taken by individuals when they first access their pension. Though individuals can still take 25% of their pension fund value as a tax-free lump sum, the maximum tax-free lump sum allowed will be £268,275 from 6th April 2023.
Additionally, the pensions annual allowance will increase from £40,000 to £60,000, and the money purchase annual allowance will rise from £4,000 to £10,000. The annual allowance taper threshold will also increase from £240,000 to £260,000.
These measures are intended to discourage skilled professionals, such as doctors, from retiring early before their pension funds trigger tax charges. Therefore, it’s advisable to discuss your situation with your IFA.
The corporation tax rate is set to change, according to the Spring Budget 2023. The planned increase in the main rate of corporation tax will take effect on 1st April 2023, and the same rates and thresholds will be applicable from 1st April 2024 to 31st March 2025.
From now on, the new main rate of 25% will be applicable to companies generating profits exceeding £250,000 per year. Companies with profits below £50,000 annually will pay the 19% small companies rate. Marginal relief will apply to companies generating profits between £50,000 and £250,000. This means that the overall tax rate for such companies will fall somewhere between 19% and 25%.
It’s important to note that companies in the same corporate group or connected by association will have to divide the £50,000 and £250,000 thresholds between them. As a result, more companies are likely to pay tax at the 25% rate.
Research & Development:
The Budget has made some changes to the corporation tax relief schemes for qualifying research and development (R&D) activities, which is not surprising given the recent focus by HMRC on R&D enforcement and awareness campaigns. The good news is that the RDEC scheme credit (for non-SMEs) will increase from 13% to 20%. However, the SME scheme will see a reduction in its expenditure enhancement rate from 230% to 186%, and the payable credit rate for loss-making companies will reduce from 14.5% to 10%.
In other news, “research-intensive” companies, i.e., those whose R&D expenditure represents at least 40% of their total expenditure, will continue to be eligible for R&D payable credits of up to 14.5%.
These changes will apply to R&D expenditure incurred on or after 1st April 2023.
Capital Gains Tax for separating/divorcing couples:
At present, when spouses or civil partners separate, assets can be transferred from one to the other without any gain or loss during the tax year in which the separation occurs. This no gain/no loss (NGNL) treatment defers any gains or losses on the transfer until the recipient spouse or civil partner disposes of the asset.
In response to the Office of Tax Simplification’s recommendations, new measures will apply to transfers made on or after 6 April 2023, allowing the NGNL treatment to be applied for up to three years after the year in which the couple ceased living together. Additionally, the NGNL treatment will apply to assets transferred between separating spouses or civil partners as part of a formal divorce agreement, regardless of the time elapsed since separation.
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