By Mark Richdon, below, Tax Director, Bishop Fleming
Major fiscal events, such as the Spring Budget, provide plenty of political column inches and debate, but certain measures can have a significant impact, both on personal finances and business.
For owner managed businesses, and their owner managers who take on significant responsibility and risk for the business’ performance, analysing the measures, understanding the impact and making the appropriate changes is crucial. In this article, I’ve outlined the key changes and what they mean for owner managed businesses.
R&D Tax Relief
A single merged Research and Development Expenditure Credit (RDEC) scheme has been created, removing the historically significant SME scheme, unless the company falls within the definition of being ‘R&D intensive’.
HMRC is still increasing its enquiry activity around R&D generally to review and check claims, but the revamped RDEC scheme means there may be an opportunity for a company to claim R&D when previously it may not have qualified.
For example, HMRC has clarified that the company carrying out the R&D and bearing the risk should be the one receiving the relief rather than a nominee, while grant-funded R&D also now attracts relief. New conditions were also introduced last year meaning claimants must notify HMRC within six months of the year end if a new claim is to be made.
This evolving landscape, with further change likely ahead, means it is now more important than ever to obtain expert advice from R&D specialists to explore what reliefs may be available for your company.
National Minimum and Living Wage
The National Living Wage age threshold has also been lowered to 21, meaning individuals turning 21 will see a huge 52.7% jump to their minimum wage. This can have a significant impact on a company’s overheads.
But companies still need to recruit good quality staff, driving up wages in a tight recruitment market regardless.
Even staff paid above the minimum wage may expect a corresponding increase. Other employee incentives may be more attractive to these workers, so benefits such as share option schemes, equity incentives and non-cash benefits should be explored where possible.
A proper review of salary structures and benefit packages can help to create a more rewarding and tax-efficient remuneration strategy for employees, particularly with the mandatory payrolling of benefits from April 2026.
Owner managers should also bear in mind that with the minimum wage increase from April this year, any existing salary sacrifice schemes could be at risk if such schemes reduce salaries below the new minimum wage rates.
VAT
The VAT registration threshold, which is the turnover level before VAT has to be charged on goods and services, has also increased by £5,000 to £90,000. Some small companies may no longer need to administer and pay VAT, making them more price competitive in the market.
Fiscal drag
The Chancellor avoided mention of fiscal drag during the Budget, but it remains a key topic of debate and a concern for taxpayers. This is where tax thresholds are frozen until 2028, so any inflationary wage rises are more exposed to tax than would have been the case if thresholds had kept pace with the prices index.
More people are being forcibly dragged into paying tax or higher rates of tax for the first time.
The annual allowance for pension contributions has remained at £60,000, along with tapering rules and thresholds. So, as wages increase with inflation, but thresholds remain frozen, dragging those increases into more tax, people may find it increasingly difficult to make tax-efficient pension contributions with their disposable income.
Even with employees’ national insurance contribution (NIC) rates decreasing by a third since last year, overall, for every £1 given back to workers by the NIC cut, £1.30 is taken in higher taxes because of thresholds remaining unchanged.
Corporation tax
Corporation tax rates and thresholds were also frozen. Our 2023 survey of owner managed businesses revealed a clear desire amongst owner managers for consistency in business taxes, which means this will be welcome news.
However, with costs rising prices will likely follow to maintain profit margins, causing increased corporation tax liabilities.
The Spring Budget also confirmed a development highlighted in the 2023 Autumn Statement. Full Expensing for corporation tax is now permanent, meaning that the purchase costs of certain plant and machinery will result in 100% tax relief, rather than attracting a lower rate of capital allowances.
Owner manager salary vs dividends
With the cut in employee NICs, owner managers now face a question of whether to take a higher salary, given the overall dividends vs salary strategy and the fact that employer NICs were not also reduced.
Changes to NICs, the dividend allowance and corporation tax rates now mean it is less clear as to the most tax-efficient dividend vs salary mix for owner managers.
Since 6 April 2023, for higher rate and additional rate taxpayers it becomes marginally more tax efficient to take a salary rather than dividends. This assumes a 25% rate of corporation tax. But for companies with profits below £250,000, the position becomes more complicated.
For basic rate taxpayers and companies benefitting from the 19% corporate tax rate, paying dividends is likely to be the better option. However, there are wider considerations to factor in. A salary payment could increase a claim for R&D tax credits, and also increase relevant earnings for personal pension contributions.
As is often the case, owner managers need to consider their personal situation, factoring in both the individual’s circumstances and those of the business. Consideration needs to be given to tax efficiency, financial stability, legal compliance, and retirement planning.
Analysing the decisions made in the Spring Budget, I doubt owner managers will take a great deal of comfort, but there are some detailed changes in taxes which could be helpful with careful planning and thought.
