Tax Changes in 2023 for Sole Traders and Small Businesses
From the 2022 Autumn Statement:
Overview for Sole Traders and Small Businesses
Due to the political climate, the 2023-2024 tax year information is trickling out in the form of adjustments to the 2022 Autumn Statement. Unfortunately, this makes it challenging for sole traders and small businesses who need to start planning their finances.
Some of the 2022 Autumn Statement has been adjusted through more recent statements to complicate the situation. You will need to keep an eye on the changes through April when the changes become final.
In general, sole traders and small businesses will probably be asked to pay more taxes and contributions. However, it’s not all bad news, and some of the regulations open up more opportunities to reduce your tax burden.
The Big Changes that Pertain to Sole Traders and Small Businesses
Corporation Tax Rate Increase
The corporation tax rate is an ongoing debate point. However, the government has thus far affirmed that the tax rate will go up to 25%, but only for corporations with £250,000 or more of profit per year. Those making less than that will pay a lower tax rate, and businesses with less than £50,000 of profit per year will stay at the 19% tax rate.
For most small businesses, that means only minimal changes in the tax rate. However, the corporate tax rate changes will likely be passed on to consumers like you and may result in price hikes on goods for your business.
Overall, you are unlikely to see massive changes for your small business unless you are wildly profitable. However, you should talk to your bookkeeper to see if this change affects you and how to prepare for the difference in regulations.
National Insurance Thresholds Updated
Autumn Statement 2022 stated that the National Insurance Contribution (NIC) threshold would be raised to match the personal allowance update. Employees must now make £242 per week, £1,048 per month, or £12,570 per year before NIC is expected.
This change could impact how much you pay as your NIC and may require adjustments to how much you put in for your employees. However, your bookkeeper and payroll software can help you adjust seamlessly.
Changes in the Minimum Wage
One of the changes that takes effect on April 1 is an increase in the minimum wage, which could affect your contract pay rate. If you have staff, you must meet or exceed the new minimum wage in their compensation.
The raise in the minimum wage will ripple through the economy and affect workers at all levels. People who currently make more than the minimum wage are also likely to receive a pay boost to keep up with the general state of the job market.
You may also find yourself paying more for contracted services or needing to charge your clients more to cover the wage changes. Overall, the difference in the minimum wage means you will need to adjust across your small business.
Tax Allowance Shifts
Tax allowance is fundamental to determining how much you will owe in tax each year. The 2023/2024 tax bands also affect anyone you employ. However, since how tax bands operate has not changed, your bookkeeping remains similar.
2023/2024 rates and bands with the personal tax allowance are:
£0 to £12,570 – 0% personal tax allowance band
£12,571 to £50,270 – 20% basic rate income tax band
£50,271 to £125,140 – 40% higher rate income tax band
Over £125,141 – 45% additional rate income tax band
Overall, the change should not feel drastic for sole traders and small businesses unless you bring home more than six figures of profit. However, combined with the changes in the minimum wage, more people may need to pay more in NIC and standard tax.
Combining all these changes, you will need to factor in the increased costs of goods and services, no matter what your small business does. However, you can also look forward to other changes the government is making with the increased tax revenue.
Research and Development Shifts
The news from Autumn Statement 2022 is not all bad. The Statement also included information about continuing and new innovation projects. These include ongoing research and development (R&D) stimulation packages.
One of the key points of the “Innovation” section of the Statement is that “Public spending on R&D will increase to £20 billion a year by 2024-25.” This funding is in addition to the Research and Development Expenditure Credit (RDEC) rate increasing to 20%.
These changes present numerous opportunities. Not only does the public spending on R&D create new resources, but the RDEC credit also means you can reduce your tax burden while you innovate. However, you may want professional advice to ensure your small business activities qualify.
Dividend Allowance Updates
As part of the Autumn Statement 2022, the dividend allowance will drop. According to the Statement, it will be £1,000 in 2023/24 and £500 in 2024/25. The government has also released a policy paper on the issue.
This change will have little impact on most sole traders and small businesses. However, the effect depends on the corporate structure you choose to operate under. If you use dividends or have shareholders, this change will affect you.
It is important to note that all ISA dividends remain unaffected by the change.
Recommended Changes to Make This April
There are a few things to do to prepare your sole trader enterprise or small business for the coming tax year. Unfortunately, the government may still change what comes into force in April so that these recommendations may change.
The first recommendation is to plan to pay a little more in tax as well as goods. This shift means setting more aside for your business to meet the changing environment you will operate in for the coming year.
The second is to find bookkeeping software that works for your small business. Even sole traders can benefit from UK-specific bookkeeping software to help with the accounting, and these software packages will take care of a lot of the minutia as long as you keep them updated.
Lastly, you may want to find a professional bookkeeper to help you handle the financial aspects of your business. Not only will an experienced bookkeeper help you track your company’s finances, but they can also help reduce your tax burden.
Looking for a bookkeeper who understands small businesses and sole traders? Contact Sherlock Accounts today!