Oh no! We have a 54.5% marginal tax rate!

The issue

Although I apologise for the slightly sensationalist title, hopefully I have got your attention. You will no doubt be aware that in Wednesday’s Budget, Rishi left personal tax rates alone and announced a 6% increase to the corporation tax rate from 1 April 2023. Initially, this did not sound too bad but the more I have considered it the worse it looks. To state things in the most pessimistic way possible:

1. Income tax rates will steadily increase in effective terms because allowances and bands have been frozen until 5 April 2026. To put this measure into context, the 2020/2021 personal allowance and basic rate band are £12,500 and £37,500 respectively. If rates had been frozen in 2016/2017 (as they were on Wednesday) then these would now be £11,000 and £32,000. This means that an individual earning £50,000 would be subject to tax on £7,000 at 40% which otherwise would have been taxable at 20%. This is quite a significant result. Expect similar reflections in 2025/2026!

2. Corporation tax will increase from 19% to 25% for companies with profits of at least £250,000 from 1 April 2023. That is an increase of 32%. It sounds worse when you put it like that.

3. The detail of the corporation tax reform is that the first £50,000 of profits will be taxed at 19%, the next £200,000 will be taxed at 26.5% and anything thereafter will be taxed at 25%.

4. Given that the additional tax rate for dividends is 38.1% (for income over £150,000) this means that £100 of company profits in the 26.5% marginal tax band will be decreased to £73.50 after corporation tax and then £45.50 after 38.1% dividend tax. That is where I got the 54.5% rate from in the title.

Forbes Dawson view

Shareholders now have two years to prepare for this stark tax landscape and for many the psychological strain of paying over 50% tax may be too great. For some, there will be an increased attraction to sell, or even liquidate so as to take advantage of low capital gains tax rates while they last. Of course, this may be a short-lived opportunity with the heavily tipped rise in capital gains tax rates over the next year. For those where exit is not a viable option they are likely to place more focus on things like family pension contributions (subject to limits) and ways of using up everybody’s lower rate tax bands. Some mobile businesses and/or their owners may leave the UK although in these cases they will need to consider the implications of things like corporate exit charges.

There were also a few decent corporation tax reliefs announced but I will leave those for now so as not to ruin the pessimistic vibe!

 

Search

Sign up for our newsletter

Interested in receiving the latest tax planning ideas?

Sign up to Tax Bites – our weekly update offering practical but effective tax saving tips.

Contact Us

You can use this form to request us to give you a call or if you prefer just leave us a message. Please be sure to leave us a contact number or email address for you and we will get back to you as soon as we can.

Phone
0161 927 9277

Email
office@forbesdawson.co.uk

Address
Fairbank House
Ashley Road
Altrincham
Cheshire
WA14 2DP