Chancellor Rishi Sunak has announced a hike in corporation tax, paid on company profits, to 25% in 2023, and will freeze a whole host of tax-free allowances in a bid to claw back money spent during the pandemic
Small increases to the income tax personal allowances for basic and higher-rate taxpayers, from £12,500 to £12,570 and £50,000 to £50,270 respectively, could also mean you’ll pay less in dividend tax and capital gains tax (CGT), or avoid it all together, from 6 April 2021.
But the thresholds are to be frozen between 2022 and 2026, meaning any further increases in future pay, dividends, capital gains or an inheritance may fall into the tax trap.
Entrepreneurs’ relief was slashed in the last Budget, and will remain at the same level for 2021-22.
Here, Which? explains what the taxes mean and looks at the changes in greater detail.
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Corporation tax to increase by 6% in 2023
Corporation tax – which is paid by UK businesses – is calculated on annual profits, in a similar way to income tax for individuals.
The chancellor has confirmed corporation tax on company profits will rise to 25% in 2023, in a bid to help pay back the UK’s rising debts.
The corporation tax rate has been 19% for all limited companies since April 2016. Prior to this, the rate varied depending on the company’s profits.
The chart below shows corporation tax rates since the 2015-16 tax year.
The government’s official Budget document states that an increase in the rate of corporation tax from April 2023 will help ‘repair the public finances’.
This will come into effect well after the point when the Office for Budget Responsibility expects the economy to return to pre-pandemic levels and on the back of an unprecedented period of support for business investment through a 130% upfront capital allowances super-deduction for investment in plant and machinery.
Furthermore, the UK’s corporation tax rate will, at 25%, remain the lowest in the G7, with a small profits rate of 19% being introduced to provide protection to the smallest businesses.
Corporation tax is payable by all UK limited companies. The following organisations may also need to pay it, even if they’re not incorporated:
- Members clubs, societies and associations
- Trade associations Housing associations
- Groups of individuals carrying out a business (such as co-operatives).
- Find out more: key points from Budget 2021
Inheritance tax nil-rate bands maintained until 2026
The government will introduce legislation so that the inheritance tax nil-rate bands will remain at existing levels until April 2026.
There are currently two tax-free allowances for inheritance. Each individual has a tax-free allowance – the ‘nil-rate band’ – of £325,000. If they are giving away a property to a direct descendant (ie children or grandchildren) there is an additional allowance called ‘the residence nil-rate band’. It is currently £175,000.
The residence nil-rate band was due to rise with inflation in April 2021, but both thresholds have been frozen until 2026. It still means, however, that married couples and civil partners can give away up to £1m free of inheritance tax.
- Find out more: how inheritance tax works
Capital gains tax allowance frozen
Capital gains tax is a tax on the profit when a person sells something which has increased in value.
How much tax you pay depends on your level of income. Basic-rate taxpayers pay 10% on profits (and 18% on profits from second properties), and higher-rate and additional-rate taxpayers pay 20% (and 28% on property)
However, each individual has a capital gains tax allowance – an amount of profit they can earn tax-free. This is currently £12,300 for individuals, personal representatives and some types of trusts and £6,150 for most trusts.
The Chancellor announced that this allowance would be frozen until 2026.
How CGT allowances have changed
- Find out more: how CGT works
Listen: our experts discuss the Budget on the Which? Money Podcast.
Dividend tax-free allowance remains at £2,000
Dividend tax is charged on dividends received by shareholders of a company. The tax-free dividend allowance has stayed the same for the 2021-22 tax year, at £2,000.
Above this dividend income tax-free allowance, you pay tax based on the rate you pay on your other income – known as your ‘tax band’ or sometimes called your ‘marginal tax rate’.
- Basic-rate taxpayers pay 7.5%
- Higher-rate taxpayers pay 32.5%
- Additional-rate taxpayers pay 38.1%
Additional-rate tax payers will remain unaffected, but when the income tax personal allowance rises in April, you could pay less in tax, or avoid it all together.
It’s also possible to avoid tax on your investment income if you hold your shares or funds in a stocks and shares Isa.
If your only income is from investments, then you can also use your tax-free personal allowance before you start paying tax on dividends.
Find out how much dividend tax you could have to pay with our dividend tax calculator.
- Find out more: how dividend tax works
No changes to entrepreneurs’ relief
If you’re selling a business, there are extra reliefs available which might mean you can pay less CGT when you sell or give away your company.
This is called entrepreneurs’ relief. For 2021-22 you’ll be charged at 10% on the first £1m of gains, when selling a qualifying business, the same as the 2020-21 tax year.
Entrepreneurs’ relief was slashed last April, so that instead of being charged 10% on the first £10m of gains, anything above £1m would be taxed at the usual 20%. The allowance applies at an individual level, so £1m is the maximum you can claim per person, rather than for each business you sell.
You can claim entrepreneurs’ relief if:
- You are a sole trader or partner selling part or all of your business or its assets
- You control at least 5% of the company’s net assets of which you are selling and are entitled to 5% of its distributable profits
You sell assets from the above businesses within three years of closing down.
- Find out more: Entrepreneurs’ relief explained