How tax changes may affect your clients in the run up to tax year end
Tax year end is fast approaching. As the weeks count down, this is a crucial period to ensure your clients’ portfolios are structured to meet their tax planning needs. Investors look to you to help them maximise allowances, exemptions and opportunities for tax saving or for making tax-advantaged investment, so we’ve put together a summary of tax changes and the solutions that may help investors structure their portfolios suitably.
2021 saw three budget announcements, with two formal budgets in March and October and a separate announcement in September which introduced the planned future increases to national insurance and dividend taxation.
The March budget brought an immediate freeze of many allowances and thresholds (income tax, capital gains tax and inheritance tax) for five years and a deferred tax increase to corporation tax. Below is a summary of key changes.
Corporation tax changes
From 1 April 2023, the main rate of corporation tax will rise from 19% to 25% on profits over £250,000. The rate remains at 19% on profits up to £50,000, which will offer some protection to small business. There will likely be a marginal relief on profits between £50,000 and £250,000, with a gradual increase somewhere between 19% and 25%.
National insurance changes
The September announcement gave us an April 2022 increase to Class 1 (employer’s and employee’s) national insurance contributions by 1.25%; rising from 12% to 13.25%. There will also be a 1.25% increase to Class 4 (self-employed) national insurance.
Dividend taxation changes
From April 2022, there will be a 1.25% increase in dividend taxation, which will apply to all dividends – whether from the recipient’s own business or from an investment.
For dividend income that exceeds the annual tax-free £2,000 dividend tax allowance, the change will move the rates payable on all dividends to 8.75% (for basic rate taxpayers), 33.75% (for higher rate taxpayer) and 39.35% (for additional rate taxpayers). The dividend trust rate will also increase to 39.35% to remain in line with the dividend additional rate.
So where does this leave us?
It’s clear these are significant changes that will impact investors and make effective tax planning more critical than ever. It is estimated that more than one in six UK taxpayers will pay a higher rate of tax by the middle of the decade. According to the Institute for Fiscal Studies, the number of people paying 40% will increase by a vast 1.3 million – totalling 11% of the UK’s adult population. This is all playing out against a backdrop of rising inflation and low interest, and the ongoing freeze on the inheritance tax nil rate band and residence nil rate band.
This conflation of pressures will likely increase investor interest in Business Relief opportunities, which can offer a rapid, flexible solution to exempt investors from paying inheritance tax on a Business Relief qualifying investment after just two years, provided the investment is also held at death. With certain AIM and unlisted private company investments qualifying for Business Relief, there is plenty of scope to structure clients’ portfolios across a range of asset classes and sectors.
In addition, the dividend tax changes and the freeze on the Capital Gains Tax annual exempt amount will need to be factored into planning, especially regarding the choice of investment wrappers. Notably, the change to dividend tax will particularly influence investors for whom income is a priority. Since the announcement, investors have flocked into Venture Capital Trusts (VCTs), and it’s likely that trend will continue with investors attracted by potential tax-free dividends alongside the possibility for greater returns and portfolio diversification.
For investors looking to extract profits from their business tax efficiently, it will be important to factor in that dividend tax change alongside the national insurance changes and corporation tax increase. These combined factors may again drive business owners towards VCT investing. For instance, investors can pay themselves a dividend from their business which is then invested into a VCT, enabling the investor to claim up to 30% income tax relief on VCT investments of up to £200,000 in each tax year, provided the VCT shares are held for at least five tax years. The VCT’s tax-free dividends provide an additional source of income, as well as no capital gains tax to pay when selling the shares.
Get in touch
Each investor benefits from a bespoke solution to meet their tax planning needs. With a wide range of investing opportunities available, please get in touch with our Business Development team to find out how our solutions could help your clients, on 020 7408 4070 or [email protected].
This communication is a financial promotion issued by Puma Investments in accordance with section 21 of the Financial Services and Markets Act 2000 (“FSMA”). This communication has been prepared by Puma Investments for information purposes only and should not be read as advice, it is intended for the recipient only and should not be forwarded on. Puma Investments is a trading name of Puma Investment Management Limited (FCA no. 590919) which is authorised and regulated by the Financial Conduct Authority. Registered office address: Cassini House, 57 St James's Street, London, SW1A 1LD. Registered as a private limited company in England and Wales No. 08210180.