Given the uncertainty businesses have faced over income tax, national insurance contributions (NIC) and corporation tax rates, it is worth revisiting the efficiency of remuneration policies. 

The corporation tax rate will increase to 25% as planned for companies with profits of £250,000 or more from 1 April 2023. The basic rate of income tax will remain at 20% indefinitely, and the additional rate of income tax remains.

However, the reversal of the 1.25 percentage point NIC increase with effect from 6 November and the repeal of the Health and Social Care levy, announced at the September 2022 mini-Budget, survived, giving rise to some savings for employees and employers. 

Taking all of these factors into account, it may be beneficial for owner-managed companies to consider undertaking a comparison of the costs of bonuses and dividends to ensure that any remuneration is at an optimal split. Additionally, changes in tax rates may affect business decisions around the relative benefits of incorporation.

Close-investment holding companies (CIHCs)

The reintroduction of a small companies rate and marginal relief has also led to the reintroduction of the CIHC regime. A CIHC is a company that is ‘closely held’ and does not exist for a ‘permitted purpose’ such as trading or the commercial letting of property. Such companies are subject to the main corporate taxation rate, irrespective of the quantum of their profits. This increase in corporation tax may affect the way investments are held. 

An investment company may still be the more attractive vehicle. Holding investments personally would result in all income being taxed on an arising basis at the individual’s marginal rate. 

Super deduction, AIA and full expensing

Disposal of super-deduction assets will generally give rise to a balancing charge. The computations are complex, with disposal proceeds being uplifted by up to 30% (or a hybrid rate, depending on the date of disposal). TAXguide13/21 provides more detail on this point. 

But this isn’t the only issue looming with the end of the super deduction. Blockages in supply chains are causing delays in the delivery of plant and machinery. Many businesses have been nervous about missing the deadline for additions to qualify for the super deduction.

The Spring Budget has, however, eased much of the pressure in this regard. From 1 April 2023, companies will be able to rely on full expensing. This is a new, temporary, 100% first-year allowance (FYA) for certain plant and machinery purchases. Given that the annual investment allowance (AIA) is set to be at £1m on a permanent basis, the vast majority of businesses will obtain full relief for their plant and machinery spend in any event. However, the UK’s largest companies will also be able to take advantage of this new FYA on main pool items. A 50% FYA continues to be available for special rate assets. 

The timing of capital purchases should therefore be considered, where appropriate, to maximise the amount of corporation tax relief. 

Angela Clegg is Business Tax Manager at ICAEW.

A version of this article first appeared in TAXline.