New year, new tax rules

The last few months of 2022 saw a slew of tax changes. The UK Government’s Autumn Statement was followed by the Scottish Budget on 15 December.

In addition, 2023 will see some previously announced changes in tax law and practice come into operation.

Tax rises from April 2023

Corporation tax

Corporation tax will increase to a standard rate of 25% from April 2023. There is a small profits rate of 19% for companies with profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will be taxed at the main rate but with “marginal relief”; this means tax is paid at a gradually increasing effective rate.

Income tax

In Scotland the top rate of income tax increases from 46% to 47%, which starts to apply at £125,140 (instead of 2022-23’s £150,000). The 41% rate becomes 42%. It applies from £43,663 (or, if the standard personal allowance of £12,570 has been lost, from £31,093); the threshold is unchanged from 2022-23.

In the rest of the UK, the 45% rate will start to apply at £125,140 (previously £150,000). The 40% rate applies from £50,271 (or, if the standard personal allowance has been lost, from £37,701). The threshold is unchanged and will remain frozen until 2028.

The divergence in income tax rates, and thresholds, between Scotland and the rest of UK continues to increase. For example, a Scottish taxpayer earning £50,000 will now pay around £1,550 more in income tax than if they were resident in England. The lowering of the top rate threshold will see an increase in the tax chargeable on higher earners in both countries compared with 2022-23; however Scottish residents in this category will also see an increase when compared with England due to the 2% differential in rates. For example, an English taxpayer earning £150,000 in 2023-24 will pay about £1,240 more in income tax than they would have paid on that same sum in 2022-23, whereas a Scottish taxpayer will pay about £2,430 more than the previous year, and about £3,850 more than their English counterpart.

Dividend allowance decrease

The dividend allowance/0% rate (for individuals and trustees) will fall from £2,000 to £1,000 from April 2023, and to £500 from April 2024.

Capital gains tax

The annual exemption/0% rate for CGT for individuals will fall from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024. For trusts it will fall to £3,000 from April 2023, and to £1,500 from April 2024.

This will have implications for residential property 60 day reporting. UK residents are under obligation to report disposals (sales or gifts) of interests in residential properties (excluding those within the principal residence exemption) within 60 days of completion of the transaction if there is tax to pay. (Non-residents must report all sales of UK property or land within 60 days, even if there is no tax to pay.) The lowering of the annual exempt amount will lead to more such disposals being subject to CGT, so in turn to more people being required to file returns, and on failure, to liability to penalties and interest charges (on any shortfall between the payment to account made with the 60 day return and overall CGT liability as calculated in their self assessment return).

For general CGT reporting purposes there is an obligation to report disposals on self assessment returns, even if there is not a gain exceeding the annual exempt amount, if proceeds of the disposal exceed a certain amount. For 2022-23 that amount (£49,200) is more than four times the annual exempt amount; for 2023-24 onwards the limit will be £50,000: it will not be four times the new, lower exempt amounts.

LBTT related changes

Additional dwelling supplement has increased from 4% to 6% for contracts entered into on or after 16 December 2022. Broadly speaking, this charge applies in addition to LBTT at the usual rates, where an individual is buying a second house or when a house is bought by a non-natural person.

Real estate: option to tax

In its continuing efforts to limit taxpayers relying on HMRC, from 1 February 2023 HMRC will:

stop issuing option to tax (“OTT”) notification receipt letters. An automatic email response will still be sent if the option to tax is submitted to optiontotaxnationalunit@hmrc.gov.uk, but not if submitted by post; and no longer respond to requests to confirm the existence of an OTT (unless the option was made more than six years ago or the request is from a Law of Property Act receiver or an insolvency practitioner).

Those involved in commercial property deals will need to ask sellers for other evidence of the existence of an OTT, such as proof of email submission to HMRC together with an automated response of around the same date and time.