The impact for limited companies, as tax year 2023-24 dawns

It was hardly a surprise, but the re-confirmation of the 25% main rate of corporation tax at Spring Budget 2023 re-ignited feelings of doom for some in the limited company contractor sector. 

Having been badly let down by a woefully thin covid support package, and with the threat of at least near-recession on the cards, some voices have spoken of this being the worst time ever to work via your own company – the nadir, writes Chris James, director of Workwell.

What a week

A significant jump in what you lose to tax” was the warning to limited companies just a few days ago, before that jump potentially came into play -- on Saturday, (April 1st 2023).

And changes to dividends from this Thursday, April 6th, so adverse that, apparently, “the days of the business owner paying themselves in dividends seem to be gone.”

While I wouldn’t go that far, looking objectively, it is possible to make a case for those feeling a sense of dismay.  

Taxing times

Tax-wise, there is indeed a lot to look at and it ain’t that pretty. But corporation tax sticks out as thornier than the rest. Some 20 years back, there was more than one rate of corporation tax – as there is for tax year 2023-24, but a small company could make profits of £300,000 before the rate started to increase above 19%. 

That threshold – before tax starts to climb -- is now only £50,001 (for a company without associates), and the punishing rate suffered of 26.5% as you climb in profits is going to feel very high. That’s even though the main rate is relatively low by G7 standards.

As for dividends, many of today’s company owners will fondly remember the days when receiving a dividend that fell into the basic rate band was effectively tax-free; thanks to the mysterious tax credit regime that disappeared in 2016. 

Above the basic rate, dividend tax was lower than it is today. And the tax-free dividend allowance, reducing from £2,000 to just £1,000 on Thursday April 6th 2023, started life at £5,000! The impact of the reduction in the allowance isn’t huge. Yet as dividend tax rates have slowly increased, dividends aren’t and don’t feel as tax-efficient as before.

And that's before you even consider IR35...

Meanwhile, since April 6th 2017 in the public sector and since April 6th 2021 in the private sector, the Off-Payroll Working (OPW) rules have had significant impacts on the contracting sector. While no one pretends that there was no bad practice to address, it’s also unreasonable to pretend that employment status is easy to get right, or that the OPW changes haven’t caused an over-correction, stifling the ability of some to work perfectly properly through their own companies. The long-term impact on UK entrepreneurship and the fintech leaders of tomorrow will take time to become clear, but it won’t be celebrated.

More in the background but not helping the average PSC nonetheless are other tax changes, notably the reduction in the Annual Exempt Amount for CGT. And not a small reduction -- from a little over £12,000 to just £6,000 for 2023/24. It’s hard to not feel like it’s targeted at those trying to build a business. That said, the impact on overall tax due to HMRC for the average entrepreneur, who is likely to make a significant gain only a few times in their lifetime, is small.

Ignored, targeted, but also reflective

Any positive amendments to business taxation from HM Treasury, such as things like the flat rate VAT scheme, either seem long ago or targeted at the tiniest of businesses. It all leads to a nagging feeling that whenever the tax regime could help, it’s as if PSCs have been ignored. Even targeted.

But let’s look for a moment beyond the contractor sector. In fact, in the wider economy, a lot of people are experiencing difficult times. Fiscal drag is real, and military activity continues to strain the economy further. The after-effects of covid and covid support are being felt worldwide. The UK needs more investment. To continue to support an increasingly elderly and ill population will require taxes on average to increase. It’s not surprising that the average person on the street feels under financial strain, and of course, that strain is not experienced equally across the population.  

The long and short of it is this -- working through your own PSC remains tax-efficient.

Quick-wins if you're Ltd

In most cases, the corporation tax rate is still overall less than 25% until your profits reach £250,000. Dividend income in the basic rate band is still effective. Pension contributions can seriously ease your corporation tax liability. Tax efficiencies can be gained by the careful planning of shareholdings and the timing of transactions. Business Asset Taper Relief (the new Entrepreneurs’ Relief) is still available for many when the company has run its course.

Yet there’s more, because whatever some may have you believe, working through your own company is about a lot more than just tax. Tax policy is usually written by permanent employees, and sometimes these payrolled ‘authors’ find it hard to accept that ‘net take home’ isn’t all that matters to those striking out on their own.

Others wins not to be sniffed at

With modern technology, being an agile master of your own destiny whereby you can pick and choose the kinds of projects that inspire you, is an enviable pursuit. Add to that the better remuneration which an experienced and truly flexible professional can command, plus the ability to take time off for life events, and the fulfilment of developing your OWN business, it’s probably best to not complain too loudly as PSC contractor in front of your full-time colleagues. In these challenging times for PSCs, I’m reminded of the many non-fiscal reasons people choose to set up by themselves, almost on a daily basis.

Not convinced? Well, in order to make the most of your freelance career, it’s crucial to get good advice. Tax efficiency is more important than ever with the tax changes now, and of recent years. The number of new schemes and systems to exploit supposed loopholes is likely to increase in the near future. Get help from people who know your sector and ask them difficult questions.

Final thought

Then remember though, taxes aren’t the only reason you took the plunge. And if you’re having a hard time, you’re not alone, either in your sector or as part of the wider population. As someone running your own business, you have more choice and flexibility than many – perhaps nobody has more autonomy than you as a PSC owner. Now is the time to remind yourself of this, and remember every day to make the most of the unique opportunities open to you, despite what might increasingly feel like the government’s best efforts to make you forget.

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Written by Chris James

Chris James BFP FCA is a Chartered Accountant who regularly speaks on taxation matters affecting Limited Company contractors, umbrella workers and the recruitment supply chain. He is is head of limited company solutions at Workwell.
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