Finance Act 2022

This article looks at the changes made by the Finance Act 2022 (which is the legislation as it relates to the tax year 2022–23) and should be read by those of you who are taking TX-UK in an exam in the period 1 June 2023 to 31 March 2024.

The aim of the article is to summarise the changes made by the Finance Act 2022 and to look at the more important changes in greater detail. The article also includes details of legislation which was enacted prior to 31 May 2022 but has only come into effect from 6 April 2022.

The article does not refer to any amendments to the TX-UK syllabus coverage unless they directly relate to legislative changes and candidates should therefore consult the TX-UK Syllabus and Study Guide for the period 1 June 2023 to 31 March 2024 for details of such amendments.

Please note that if you are sitting TX-UK in the period 1 June 2022 to 31 March 2023, you will be examined on the Finance Act 2021, which is the legislation as it relates to the tax year 2021-22. Therefore, this article is not relevant to you, and you should instead refer to the Finance Act 2021 article published on the ACCA website (See ‘Related links’).

You are reminded that none of the current or impending devolved taxes for Scotland, Wales, and Ireland are, or will be, examinable.

Income tax

Rates of income tax

The tax rates on dividend income have all been increased by 1.25%. The thresholds and tax rates on other income are unchanged.

The rates of income tax for the tax year 2022–23 are therefore:

A starting rate of 0% applies to savings income where it falls within the first £5,000 of taxable income.

Personal allowance

The personal allowance for the tax year 2022–23 is £12,570.

This is gradually reduced to nil where a person’s adjusted net income exceeds £100,000. Adjusted net income is net income (total income less deductions for gross pension contributions to an employer’s occupational pension scheme, loss relief and deductible interest payments) less the gross amount of personal pension contributions and gift aid donations.

The personal allowance is reduced by £1 for every £2 by which a person’s adjusted net income exceeds £100,000. Therefore, a person with adjusted net income of £125,140 or more is not entitled to any personal allowance ((125,140 – 100,000)/2 = £12,570). Where a person has adjusted net income of between £100,000 and £125,140, then the effective marginal rate of income tax is 60%. This is the higher rate of 40% on income plus an additional 20% as a result of the withdrawal of the personal allowance. In this situation, it may be beneficial to make additional personal pension contributions or gift aid donations.

EXAMPLE 1
For the tax year 2022–23, June has a trading profit of £184,000. Her income tax liability is:

No personal allowance is available because June’s adjusted net income of £184,000 exceeds £125,140.

EXAMPLE 2
For the tax year 2022–23, May has a trading profit of £159,000. During the year, May made net personal pension contributions of £32,000 and a net gift aid donation of £9,600. Her income tax liability is:

• May’s gross personal pension contributions are £40,000 (32,000 x 100/80) and her gross gift aid donation is £12,000 (9,600 x 100/80).
• May’s adjusted net income is therefore £107,000 (159,000 – 40,000 – 12,000), so her personal allowance of £12,570 is reduced to £9,070 (12,570 – 3,500 ((107,000 – 100,000)/2)).
• The basic and higher rate tax bands are both extended by £52,000 (40,000 + 12,000).

Savings income

Interest received from bank and building societies is paid gross without any tax being suffered at source. Certain types of savings income are paid net of basic rate tax, but these are not examinable. Therefore, as far as TX-UK is concerned, all savings income is treated as paid gross.

Savings income benefits from a 0% rate. For basic rate taxpayers, the savings income nil rate band for the tax year 2022–23 is £1,000, and for higher rate taxpayers it is £500. Additional rate taxpayers do not benefit from any savings income nil rate band. Savings income in excess of the savings income nil rate band is taxed at the basic rate of 20% if it falls below the basic rate threshold of £37,700, at the higher rate of 40% if it falls between the basic rate threshold of £37,700 and the higher rate threshold of £150,000, and at the additional rate of 45% if it exceeds the higher rate threshold of £150,000.

EXAMPLE 3
For the tax year 2022–23, Ingrid has a salary of £52,500 and savings income of £1,800. Her income tax liability is:

Ingrid is a higher rate taxpayer, so her savings income nil rate band is £500.

The savings income nil rate band counts towards the basic rate and higher rate bands.

EXAMPLE 4
For the tax year 2022–23, Henri has a salary of £46,500 and savings income of £10,000. During the year, he made gross personal pension contributions of £4,000. His income tax liability is:

• Henri is a higher rate taxpayer, so his savings income nil rate band is £500.
• The savings income nil rate band of £500 counts towards the basic rate band of £37,700. This is then extended by £4,000.

Savings income can also benefit from the starting rate of 0%. However, the starting rate only applies where savings income falls within the first £5,000 of taxable income. If non-savings income exceeds £5,000, then the starting rate of 0% for savings does not apply.

EXAMPLE 5
For the tax year 2022–23, Ali has pension income of £14,200 and savings income of £6,000. His income tax liability is:

• Non-savings income is £1,630 (14,200 – 12,570), so £3,370 (5,000 – 1,630) of the savings income benefits from the starting rate of 0%.
• Ali is a basic rate taxpayer, so his savings income nil rate band is £1,000.

When it comes to tax planning for a married couple, or a couple in a civil partnership, the availability of the savings income nil rate band means that transferring income from the partner paying tax at a higher rate to the partner paying tax at a lower rate is not necessarily the most beneficial option.

EXAMPLE 6
Samuel and Samantha are a married couple. For the tax year 2022–23, Samuel will have a salary of £90,000. Samantha will have a salary of £30,000 and savings income of £1,500.

Samantha is a basic rate taxpayer, so her savings income nil rate band is £1,000. The remaining £500 of her savings income will be taxable at the rate of 20%. Samuel is a higher rate taxpayer, so his savings income nil rate band is £500. Transferring sufficient savings to Samuel so that he receives £500 of the savings income will therefore save income tax of £100 (500 at 20%) for 2022–23.

Dividends

The first £2,000 of dividend income for the tax year 2022–23 benefits from a 0% rate. This £2,000 nil rate band is available to all taxpayers, regardless of whether they pay tax at the basic, higher or additional rate. However, the dividend nil rate band counts towards the basic rate and higher rate bands.

Dividend income in excess of the £2,000 nil rate band is taxed at 8.75% if it falls below the basic rate threshold of £37,700, at 33.75% if it falls between the basic rate threshold of £37,700 and the higher rate threshold of £150,000, and at 39.35% if it exceeds the higher rate threshold of £150,000.

EXAMPLE 7
For the tax year 2022–23, Ezra has a salary of £62,500 and dividend income of £3,800. Her income tax liability is:

EXAMPLE 8
For the tax year 2022–23, Erica has a salary of £44,000 and dividend income of £8,500. Her income tax liability is:

The £2,000 dividend nil rate band counts towards the basic rate band of £37,700.

The order in which tax rates are applied to taxable income is firstly non-savings income, then savings income and finally dividend income. Deductible interest, trade losses and the personal allowance should initially be set against non-savings income and then savings income. 

EXAMPLE 9
For the tax year 2022–23, Joe has a salary of £46,700, savings income of £2,000 and dividend income of £6,000. During the year, he paid interest of £300 which was for a qualifying purpose. Joe’s employer deducted income tax of £6,826 under PAYE from his earnings. The income tax payable by Joe is:

• Joe is a higher rate taxpayer, so his savings income nil rate band is £500.
• The dividend nil rate band uses up the remaining basic rate band of £1,870 (37,700 – 33,830 – 500 – 1,500).

The savings income and dividend nil rate bands will mean that many taxpayers do not have any tax liability in respect of savings and dividend income.

EXAMPLE 10
For the tax year 2022–23, Ming has property income of £26,700, savings income of £700 and dividend income of £1,200. Her income tax liability is:

Ming is a basic rate taxpayer, so her savings income nil rate band is £1,000. This is restricted to the actual savings income of £700. Likewise all of her dividend income is taxed at 0% because it falls within the £2,000 dividend nil rate band.

The availability of the dividend nil rate band (together with the savings income nil rate band) may reduce overall tax for married couples and couples in civil partnerships.

EXAMPLE 11
Nigel and Nook are a married couple. For the tax year 2022–23, Nigel will have a salary of £160,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £3,800.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2022–23.

Nook has fully utilised her dividend nil rate band of £2,000, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £1,800 of the dividend income will therefore save income tax of £608 (1,800 at 33.75%) for 2022–23.

Given the tax rates which apply to dividend income, incorporating the business of a sole trader or partnership will not necessarily result in a tax saving. The rates also impact on the decision whether to extract profits from a company either as director’s remuneration or as dividends.

EXAMPLE 12
Sam is currently self-employed. If he continues to trade on a self-employed basis, his trading profit for the year ended 5 April 2023 is forecast to be £50,000. Based on this figure, Sam’s total income tax liability and national insurance contributions (NIC) for the tax year 2022–23 will be £11,486.

Sam is considering incorporating his business on 6 April 2022. The forecast taxable total profits of the new limited company for the year ended 5 April 2023 will be £50,000. After paying corporation tax of £9,500, Sam will withdraw all of the profits by paying himself dividends of £40,500 (50,000 – 9,500) during the tax year 2022–23.

Sam’s income tax liability will be:

The total tax cost if Sam incorporates his business is £11,769 (9,500 + 2,269). This is £283 (£11,769 – £11,486) more than if Sam continues to trade on a self-employed basis.

However, incorporation can provide other tax advantages. For example, the corporation tax rate on profits remaining undrawn within a company is just 19%. This compares to the higher and additional rates of 40% and 45% which can be payable by a sole trader or partners.

Transferable amount of personal allowance

The transferable amount of personal allowance (also known as the marriage allowance or marriage tax allowance) is £1,260 for the tax year 2022–23. This fixed amount can be transferred between spouses (or registered civil partners) provided neither is a higher rate or additional rate taxpayer.

The benefit is given to the recipient as a reduction from their income tax liability at the basic rate of tax, so the tax reduction is therefore £252 (1,260 at 20%). If the recipient’s tax liability is less than £252, then the tax reduction is restricted so that the recipient’s tax liability is not reduced below zero.

EXAMPLE 13
Paul and Rai are a married couple. For the tax year 2022–23, Rai has a salary of £38,000 and Paul has a trading profit of £10,000. They have made an election to transfer the fixed amount of personal allowance from Paul to Rai.

Paul’s personal allowance is reduced to £11,310 (12,570 – 1,260), and because this is higher than his trading profit of £10,000 he does not have any tax liability.

Rai’s income tax liability is:

Employment income

Company car benefit
There is just one set of company car percentages for the tax year 2022–23, and these apply regardless of when a company car was registered:

• The percentage for electric cars with zero CO₂ emissions is 2%.
• For hybrid-electric cars with CO₂ emissions between 1 and 50 grams per kilometre, the electric range of a car is relevant in determining the car benefit percentage, as follows:

• For a car with a CO₂ emission rate of between 51 and 54 grams per kilometre, the percentage is 15%.
• A 16% base percentage applies once CO₂ emissions reach a base level of 55 grams per kilometre.
• The base percentage of 16% rises in 1% steps for each 5 grams per kilometre above the base level of 55 grams per kilometre, up to a maximum of 37%.
• There is a 4% surcharge for diesel cars which do not meet the real driving emissions 2 (RDE2) standard. Company diesel cars meeting the RDE2 standard are treated as if they were petrol cars. The percentage rates (including the lower rate of 15%) are increased by 4% for diesel cars which do not meet the standard, but not beyond the maximum percentage rate of 37%.

The company car benefit information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

Car benefit percentage
The relevant base level of CO₂ emissions is 55 grams per kilometre. The percentage rates applying to petrol cars (and diesel cars meeting the RDE2 standard) with CO₂ emissions up to this level are:

The percentage for electric cars with zero CO₂ emissions is 2%.

For hybrid-electric cars with CO₂ emissions between 1 and 50 grams per kilometre, the electric range of a car is relevant:

EXAMPLE 14
During the tax year 2022–23, Fashionable plc provided the following employees with company cars:

Amanda was provided with a hybrid-electric company car throughout the tax year 2022–23. The car has a list price of £32,200, an official CO₂ emission rate of 24 grams per kilometre and an electric range of 90 miles.

Betty was provided with a new diesel company car throughout the tax year 2022–23. The car has a list price of £16,400 and an official CO₂ emission rate of 99 grams per kilometre. The  car meets the RDE2 standard.

Charles was provided with a new diesel company car on 6 August 2022. The car has a list price of £13,500 and an official CO₂ emission rate of 102 grams per kilometre. The car does not meet the RDE2 standard.

Diana was provided with a new petrol company car throughout the tax year 2022–23. The car has a list price of £84,600 and an official CO₂ emission rate of 178 grams per kilometre. Diana paid Fashionable plc £1,200 during the tax year 2022–23 for the use of the car.

Amanda
With CO₂ emissions between 1 and 50 grams per kilometre, the electric range of the car is relevant. This is between 70 and 129 miles, so the relevant percentage is 5%. The car was available throughout 2022–23, so the benefit is £1,610 (32,200 x 5%).

Betty
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The CO₂ emissions figure of 99 is rounded down to 95 so that it is divisible by five. The minimum percentage of 16% is increased in 1% steps for each five grams per kilometre above the base level, so the relevant percentage is 24% (16% +  8% ((95 – 55)/5)). The 4% surcharge for diesel cars is not applied because the RDE2 standard is met. The car was available throughout 2022–23, so the benefit is £3,936 (16,400 x 24%).

Charles
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 29% (16% + 9% ((100 – 55)/5) + 4% (charge for a diesel car not meeting the RDE2 standard)). The car was only available for eight months of 2022–23, so the benefit is £2,610 (13,500 x 29% x 8/12).

Diana
The CO₂ emissions are above the base level figure of 55 grams per kilometre. The relevant percentage is 40% (16% + 24% ((175 – 55)/5)), but this is restricted to the maximum of 37%. The  car was available throughout 2022–23, so the benefit is £30,102 ((84,600 x 37%) – 1,200). The contribution by Diana towards the use of the car reduces the benefit.

Company van benefit
The annual scale charge used to calculate the benefit where an employee is provided with a company van has been increased from £3,500 to £3,600.

Vans producing zero CO₂ emissions (zero emission vans) have a zero benefit charge.

Company car fuel benefit
The fuel benefit is calculated as a percentage of a base figure which is announced each year. For the tax year 2022–23, the base figure has been increased from £24,600 to £25,300.

The percentage used in the calculation is exactly the same as that used for calculating the related company car benefit.

EXAMPLE 15
Continuing with example 14.

Amanda was provided with fuel for private use between 6 April 2022 and 5 April 2023.

Betty was provided with fuel for private use between 6 April 2022 and 31 December 2022.

Charles was provided with fuel for private use between 6 August 2022 and 5 April 2023.

Diana was provided with fuel for private use between 6 April 2022 and 5 April 2023. She paid Fashionable plc £600 during the tax year 2022–23 towards the cost of private fuel, although the actual cost of this fuel was £1,000.

Amanda
Amanda was provided with fuel for private use throughout 2022–23, so the benefit is £1,265 (25,300 x 5%).

Betty
Betty was provided with fuel for private use for nine months of 2022–23, so the benefit is £4,554 (25,300 x 24% x 9/12).

Charles
Charles was provided with fuel for private use for eight months of 2022–23, so the benefit is £4,891 (25,300 x 29% x 8/12).

Diana
Diana was provided with fuel for private use throughout 2022–23, so the benefit is £9,361 (25,300 x 37%). There is no reduction for the contribution made by Diana because the cost of private fuel was not fully reimbursed.

Company van fuel benefit
The fuel benefit where private fuel is provided for a company van has been increased from £669 to £688.

There is no fuel benefit for a company van which produces zero CO₂ emissions (a zero emission van).

Approved mileage allowances
Approved mileage allowances rates are unchanged, with a rate of 45p per mile for the first 10,000 business miles, and 25p per mile for business mileage in excess of 10,000 miles.

Official rate of interest
The official rate of interest is used when calculating the taxable benefit arising from a beneficial loan or from the provision of living accommodation costing in excess of £75,000.

For exams in the period 1 June 2023 to 31 March 2024, the actual official rate of interest of 2% for the tax year 2022–23 will be used.

Capital allowances

Annual investment allowance
The current annual investment allowance (AIA) limit of £1,000,000 has been extended until 31 March 2023.

The AIA provides an allowance of 100% for the first £1,000,000 of expenditure on plant and machinery in a 12 month period. Any expenditure in excess of the £1,000,000 limit qualifies for writing down allowances (WDA) as normal. The AIA applies to all expenditure on plant and machinery with the exception of cars. The £1,000,000 limit is proportionally reduced or increased where a period of account is shorter or longer than 12 months. For example, for the three-month period ended 31 December 2022, the AIA limit would be £250,000 (1,000,000 x 3/12).

EXAMPLE 16
Ling prepares accounts to 31 March. On 1 April 2022, the tax written down value of plant and machinery in her main pool is £16,700.

The following transactions took place during the year ended 31 March 2023:

• Car (1) purchased on 8 April 2022 has CO₂ emissions of 40 grams per kilometre. This car is used by Ling and 20% of the mileage is for private journeys.
• Car (2) purchased on 14 April 2022 and sold on 12 December 2022 has CO₂ emissions of 75 grams per kilometre.
• Car (3) purchased on 2 September 2022 has CO₂ emissions of 45 grams per kilometre.
• Car (4) purchased on 19 November 2022 is a new electric car with zero CO₂ emissions.

Ling’s capital allowance claim for the year ended 31 March 2023 is:

• Car (1) is kept separately because there is private use by Ling. This  car has CO₂ emissions between 1 and 50 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18%.
• Car (2) had CO₂ emissions over 50 grams per kilometre and therefore qualifies for writing down allowances at the rate of 6%. Even though it is the only asset in the special rate pool, there is no balancing allowance on the disposal of this  car because the expenditure is included in a pool.
• Car (3) has CO₂ emissions between 1 and 50 grams per kilometre and therefore qualifies for writing down allowances at the rate of 18% in the main pool.
• Car (4) has zero CO₂ emissions and therefore qualifies for the 100% first year allowance.

Zero-emission  cars
New cars with zero CO₂ emissions qualify for the 100% first year allowance, so the cost is effectively deducted as an expense in the year of purchase.

If provided as company cars and the 2% car benefit percentage is available, there are minimal income tax implications for the employee and only a very small amount of class 1A national insurance contributions (NICs) payable for the employer.

Providing low-emission cars as company cars is therefore very beneficial, especially for directors who are also 100% shareholders in their own companies.

Structures and buildings allowance
The annual straight-line allowance is unchanged at 3%, with relief being given over a 33⅓ year period (33 years and four months).

The structures and buildings allowance (SBA) is only available where a building (or structure) has been constructed on or after 29 October 2018 (the date of the 2018 Budget). However, a question will only be set where construction is on or after 6 April 2020 (1 April 2020 for limited companies).

EXAMPLE 17
Hipster Ltd prepares accounts to 31 March. On 1 July 2022, the company purchased a newly constructed factory from a builder for £470,000 (including land of £110,000). The factory was brought into use on 1 September 2022.

The qualifying expenditure for SBA is £360,000 (470,000 – 110,000). The factory was brought into use on 1 September 2022, so the SBA for the year ended 31 March 2023 is £6,300 (360,000 at 3% x 7/12).

An allowance of £10,800 (360,000 at 3%) will be given in subsequent years.

Relief is also given for the cost of subsequent improvements, or where a building is renovated or converted.

EXAMPLE 18
Ballpoint Ltd prepares accounts to 31 March. The company renovated a disused warehouse (originally purchased in 2011) at a cost of £82,000, with the warehouse subsequently brought into use on 1 January 2023.

The renovation expenditure qualifies for relief. As the warehouse was brought into use on 1 January 2023, the SBA for the year ended 31 March 2023 is £615 (82,000 at 3% x 3/12).

The original cost of the warehouse does not qualify for the SBA, being purchased prior to 29 October 2018. Even if it had qualified, the SBA for the renovation expenditure would have been kept entirely separate from the SBA on the original cost.

Unlike plant and machinery, there is no balancing charge or balancing allowance when a building (or structure) that has qualified for the SBA is sold. Instead, the purchaser simply continues to claim the 3% allowance for the remainder of the 33⅓ year period based on original cost.

However, on a disposal, the allowances that have been claimed are effectively clawed back by adding them to the sales proceeds in order to determine the chargeable gain or allowable loss arising.

EXAMPLE 19
Continuing with example 17.

Hipster Ltd sold its factory to Gentrified Ltd on 31 March 2023 for £500,000 (including land of £120,000). Gentrified Ltd also prepares accounts to 31 March.

The sale of the factory will not affect Hipster Ltd’s SBA claim for the year ended 31 March 2023. From the year ended 31 March 2024 onwards, Gentrified Ltd will claim £10,800 (360,000 at 3%) annually based on the original cost to Hipster Ltd. The SBA will run for the remaining 32 years and nine months of the 33⅓ year period that commenced on 1 September 2022.

Hipster Ltd’s sale proceeds of £500,000 will be increased by the allowance claimed of £6,300. The chargeable gain on the disposal will therefore be £36,300 (500,000 + 6,300 – 470,000).

You should assume that for any question involving the purchase (as opposed to a new construction) of a building, the SBA is not available unless stated otherwise.

Enhanced capital allowances for companies only, are covered in more detail in the corporation tax section of this article.

The capital allowances information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

Capital allowances: rates of allowance

Individual savings accounts

The individual savings account (ISA) investment limit for the tax year 2022-23 is unchanged at £20,000. The £20,000 limit is completely flexible, so a person can invest £20,000 in a cash ISA, or they can invest £20,000 in a stocks and shares ISA, or in any combination of the two – such as £10,000 in a cash ISA and £10,000 in a stocks and shares ISA.

The availability of the savings income nil rate band for basic and higher rate taxpayers means that there is no tax benefit to investing in cash ISAs for many individuals. However, cash ISAs are advantageous for additional rate taxpayers and for other individuals where their savings income nil rate band is already utilised.

The availability of the dividend nil rate band means that there is no tax advantage to receiving dividend income within a stocks and shares ISA for individuals with dividend income of £2,000 or less. However, chargeable gains made within a stocks and shares ISA are exempt from capital gains tax. Stocks and shares ISAs are therefore advantageous where chargeable gains are made in excess of the annual exempt amount.

National insurance contributions (NIC)

For the tax year 2022–23, there was an increase of 1.25% included within the rates of class 1, class 1A and class 4 NIC. This increase was later removed by the UK Government but for the purposes of the tax rates to be used in exams from 1 June 2023 to 31 March 2024, the additional 1.25% will be used for the whole tax year 2022–23.

Threshold increases
The employee class 1 earnings threshold was increased to £12,570 from 6 July 2022. The only reason this change did not come in from 6 April 2022 was to give employers time to prepare. It was not announced until the Chancellor’s Spring Statement on 23 March 2022. The increased threshold is now the same as the income tax personal allowance.

For exams in the period 1 June 2023 to 31 March 2024, it will be assumed that the increased threshold of £12,570 applies throughout the tax year 2022-23.

The same approach will be taken in regard to the class 2 and class 4 lower profits limit. In both cases, for exams in the period 1 June 2023 to 31 March 2024, it will be assumed that the threshold is the increased amount of £12,570.

Occasionally, a question will require class 1 NIC calculations on a monthly basis. For exams in the period 1 June 2023 and 31 March 2024, should a monthly class 1 NIC calculation be required, it will be assumed that the threshold of £12,570 applies throughout the tax year 2022-23. The employee class 1 earnings monthly threshold will therefore be £12,570/12 = £1,048.

Class 1 and class 1A NIC
For the tax year 2022-23, the rates of employee class 1 NIC have been increased by 1.25% to 13.25% and 3.25%. The rate of 13.25% will be paid on earnings between £12,570 per year and £50,270 per year, and the rate of 3.25% is paid on all earnings over £50,270 per year.

The rate of employer’s class 1 NIC has been increased by 1.25% to 15.05%, and is paid on all earnings over £9,100 per year. Note that this limit is not aligned with the employee limit.

The rate of class 1A NIC which employers pay on taxable benefits provided to employees has been increased by 1.25% to 15.05%.

Employment allowance
The annual employment allowance for the tax year 2022-23 has been increased from £4,000 to £5,000. This can be used by businesses to reduce the amount of employer’s class 1 NIC which is paid to HM Revenue and Customs (HMRC). For example, if a business’s total employer’s class 1 NIC for the tax year 2022-23 is £5,600, then only £600 (5,600 – 5,000) will be paid to HMRC. If total employer’s class 1 NIC is £5,000 or less, then the liability will be nil. The employment allowance is not available:

• To companies where a director is the sole employee; or
• Where employers’ contributions are £100,000 or more for the previous tax year.

The class 1 and class 1A NIC information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

National insurance contributions

EXAMPLE 20
Simone Ltd has three employees who are each paid £60,000 per year. One of the employees was provided with the following taxable benefits during the tax year 2022–23:

The class 1 and class 1A NIC liabilities are:

Class 2 NIC
For the tax year 2022–23, the rate of class 2 NIC has been increased to £3.15 per week.

Class 2 NIC is payable where profits exceed a lower profits limit of £12,570.

Class 4 NIC
The rates of class 4 NIC have been increased by 1.25% to 10.25% and 3.25%. The rate of 10.25% will be paid on profits between £12,570 and £50,270, and the rate of 3.25% is paid on all profits over £50,270.

The class 2 and 4 NIC information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

National insurance contributions

EXAMPLE 21
Jimmy and Jenny are both self-employed. Their trading profits for the tax year 2022–23 are respectively £25,000 and £60,000. The class 4 NIC liabilities are:

Pension schemes

Annual allowance
The annual allowance for the tax year 2022–23 is unchanged at £40,000.

For the tax year 2022–23, the annual allowance is reduced by £1 for every £2 by which a person’s adjusted income exceeds £240,000, down to a minimum tapered annual allowance of £4,000. Therefore, a person with adjusted income of £312,000 or more, will only be entitled to an annual allowance of £4,000 (40,000 – ((312,000 – 240,000)/2) = £4,000).

Tapering applies on a tax year basis, so a taxpayer with variable income might find themselves entitled to the full £40,000 annual allowance in some years, and a tapered annual allowance in other years.

The definition of adjusted income is net income plus any employee contributions to occupational pension schemes (these will have been deducted in calculating net income) plus any employer contributions to either occupational or personal pension schemes. For the self-employed, adjusted income will simply be net income.

EXAMPLE 22
For the tax year 2022–23, Juliet has a trading profit of £286,000. She has never previously been a member of a pension scheme.

Juliet’s tapered annual allowance for 2022–23 is £17,000 (40,000 – ((286,000 – 240,000)/2)).

Carry forward
If the annual allowance is not fully used in any tax year, then it is possible to carry forward any unused allowance for up to three years.

It is possible to use brought forward unused annual allowances in the tax year 2022–23 if a tapered annual allowance applies for this year. However, it is the tapered annual allowance for 2022–23 which is used to establish whether any carried forward is available from this year to future tax years.

Carry forward is only possible if a person is a member of a pension scheme for a particular tax year. Therefore, for any year in which a person is not a member of a pension scheme the annual allowance is lost.

EXAMPLE 23
Monica and Nicola have made the following gross personal pension contributions during the tax years 2019–20, 2020–21 and 2021–22:

Monica was not a member of a pension scheme for the tax year 2019–20. Nicola was a member of a pension scheme for all three tax years. Neither Monica nor Nicola have sufficient income for their annual allowances to be tapered.

Monica
Monica has unused allowances of £8,000 (40,000 – 32,000) from 2020–21 and £12,000 (40,000 – 28,000) from 2021–22, so, with the annual allowance of £40,000 for 2022–23, a total of £60,000 (40,000 + 8,000 + 12,000) is available for 2022–23. She was not a member of a pension scheme for 2019–20, so the annual allowance for that year is lost.

Nicola
Nicola has unused allowances of £21,000 (40,000 – 19,000) from 2020–21 and £40,000 from 2021–22, so, with the annual allowance of £40,000 for 2022–23, a total of £101,000 (40,000 + 21,000 + 40,000) is available for 2022–23. The annual allowance for 2019–20 is fully utilised, but Nicola was a member of a pension scheme for 2021–22 so the annual allowance for that year is available in full.

The annual allowance for the tax year 2022–23 is utilised first, then any unused allowances from earlier years with those from the earliest year used first.

EXAMPLE 24
Perry has made the following gross personal pension contributions:

Perry does not have sufficient income for his annual allowance to be tapered.

The pension contribution of £48,000 for 2022–23 has used all of Perry’s annual allowance of £40,000 for 2022–23 and £8,000 (48,000 – 40,000) of the unused allowance of £18,000 (40,000 – 22,000) from 2019–20. Perry therefore has unused allowances of £9,000 (40,000 – 31,000) from 2020–21 and £21,000 (40,000 – 19,000) from 2021–22 to carry forward to 2023–24. The remaining unused allowance of £10,000 (18,000 – 8,000) from 2019–20 cannot be carried forward to 2023–24 because this is more than three years ago.

EXAMPLE 25
Chong has made the following gross personal pension contributions:

Chong’s adjusted income for the tax year 2022–23 is £340,000, but for previous tax years he did not have sufficient income for his annual allowance to be tapered.

Chong’s tapered annual allowance for 2022–23 is the minimum of £4,000 because his adjusted income exceeds £312,000. Chong therefore has unused allowances of £9,000 (40,000 – 31,000) from 2020–21, £21,000 (40,000 – 19,000) from 2021–22 and £1,000 (4,000 – 3,000) from 2022–23 to carry forward to 2023–24.

Although tax relief is available on pension contributions up to the amount of earnings for a particular tax year, the annual allowance acts as an effective annual limit. Where tax relieved contributions are paid in excess of the annual allowance (including any brought forward unused allowances), then there will be an annual allowance charge. This charge is subject to income tax at a person’s marginal rates.

EXAMPLE 26
For the tax year 2022–23, Frank has a trading profit of £97,500 and made gross personal pension contributions of £45,000. He does not have any brought forward unused annual allowances. Frank’s income tax liability is:

• Frank has earnings of £97,500 for 2022–23. All of the pension contributions of £45,000 therefore qualify for tax relief.
• Frank’s adjusted income is clearly less than £240,000, so the full annual allowance of £40,000 is available for 2022–23.
• The annual allowance charge of £5,000 is the excess of the pension contributions over the annual allowance.
• Frank will have paid £36,000 (45,000 less 20%) to the personal pension company.
• Higher rate tax relief is given by extending the basic rate tax band to £82,700 (37,700 + 45,000).

Lifetime allowance
The lifetime allowance for the tax year 2022–23 is unchanged at £1,073,100.

The lifetime allowance applies to the total funds which can be built up within a person’s pension schemes. Where the limit is exceeded, there will be an additional tax charge when that person subsequently withdraws the funds in the form of a pension.

The pension scheme information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

Pension scheme limits

The maximum contribution which can qualify for tax relief without any earnings is £3,600.

Capital gains tax

Annual exempt amount

The annual exempt amount for the tax year 2022–23 is unchanged at £12,300.

Payments on account for disposals of residential property

A payment on account has to be made where capital gains tax is payable in respect of a disposal of residential property. A return must be submitted to HMRC at the same time. The deadline for making the payment and submitting the return has been extended from 30 days to 60 days after the completion date.

Rates of capital gains tax

The lower rate and the higher rate of capital gains tax for the tax year 2022–23 are unchanged at 10% and 20%. The residential property rates are also unchanged at 18% and 28%. These apply where a gain arising from the disposal of residential property is not fully covered by private residence relief.

Chargeable gains are taxed at the lower rate of 10% (or 18%) where they fall within the basic rate band of £37,700, and at the higher rate of 20% (or 28%) where they exceed this threshold. The basic rate band is extended if a person pays personal pension contributions or makes a gift aid donation.

EXAMPLE 27
For the tax year 2022–23, Adam has a salary of £44,000. During the year, he made net personal pension contributions of £4,400. On 15 June 2022, Adam sold an antique table and this resulted in a chargeable gain of £21,800.

For the tax year 2022–23, Bee has a trading profit of £60,000. On 20 August 2022, she sold an antique vase and this resulted in a chargeable gain of £20,100.

For the tax year 2022–23, Chester has a salary of £43,500. On 31 October 2022, he completed the sale of a residential property and this resulted in a chargeable gain of £47,300.

Adam
Adam’s taxable income is £31,430 (44,000 less the personal allowance of 12,570). His basic rate tax band is extended to £43,200 (37,700 + 5,500 (4,400 x 100/80)), of which £11,770 (43,200 – 31,430) is unused.

Adam’s taxable gain of £9,500 (21,800 less the annual exempt amount of 12,300) is fully within the unused basic rate tax band, so his capital gains tax liability is therefore £950 (9,500 at 10%). This will be due on 31 January 2024.

Bee
Bee’s taxable income is £47,430 (60,000 – 12,570), so all of her basic rate tax band has been used. The capital gains tax liability on her taxable gain of £7,800 (20,100 – 12,300) is therefore £1,560 (7,800 at 20%). This will be due on 31 January 2024.

Chester
Chester’s taxable income is £30,930 (43,500 – 12,570), so £6,770 (37,700 – 30,930) of his basic rate tax band is unused. The capital gains tax liability on Chester’s taxable gain of £35,000 (47,300 – 12,300) is therefore:

Assuming Chester’s income for the tax year 2022-23 was correctly estimated at the time of the residential property disposal, his capital gains tax liability of £9,123 will have been paid within 60 days of the completion date (30 December 2022), with no adjustment necessary under the self-assessment system.

Where a person has both residential property gains and other gains, then the annual exempt amount and any capital losses should initially be deducted from the residential property gains. This approach will save capital gains tax at either 18% or 28%, compared to either 10% or 20% if used against the other gains.

However, how any unused basic rate tax band is allocated between chargeable gains does not make any difference to the overall capital gains tax liability (since the differential is 10% in both cases).

EXAMPLE 28
For the tax year 2022–23, Douglas does not have any income. On 15 June 2022, he sold an antique vase and this resulted in a chargeable gain of £19,000. On 28 August 2022, he sold a residential property and this resulted in a chargeable gain of £39,800.

Ignoring the payment on account in respect of the residential property gain, Douglas’ capital gains tax liability is:

• The annual exempt amount is set against the residential property gain.
• The capital gains tax liability could alternatively be calculated as:

Business asset disposal relief

Business asset disposal relief can be claimed when an individual disposes of a business or a part of a business. For the tax year 2022–23, the lifetime qualifying limit is unchanged at £1 million.

Gains qualifying for business asset disposal relief are taxed at a rate of 10% regardless of the level of a person’s taxable income.

EXAMPLE 29
On 25 January 2023, Michael sold a 30% shareholding in Green Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £800,000. Michael had owned the shares since 1 March 2016 and was an employee of the company from that date until the date of disposal.

He has taxable income of £8,000 for the tax year 2022–23.

Michael’s capital gains tax liability is:

Although chargeable gains which qualify for business asset disposal relief are always taxed at a rate of 10%, they must be taken into account when establishing the rate which applies to other chargeable gains. Chargeable gains qualifying for business asset disposal relief therefore reduce the amount of any unused basic rate tax band.

The annual exempt amount and any capital losses should initially be deducted from those chargeable gains which do not qualify for business asset disposal relief (giving preference to any residential property gains). This approach could save capital gains tax at 20% (18% or 28% if residential property gains are involved), compared to just 10% if used against chargeable gains which do qualify for relief.

There are several ways of presenting computations involving such a mix of chargeable gains, but the simplest approach is to keep chargeable gains qualifying for business asset disposal relief and other chargeable gains separate.

EXAMPLE 30
On 30 September 2022, Mika sold a business which she had run as a sole trader since 1 January 2016. The sale resulted in the following chargeable gains:

The warehouse had never been used by Mika for business purposes.

Mika has taxable income of £8,000 for the tax year 2022–23. She has unused capital losses of £28,000 brought forward from the tax year 2021–22.

Mika’s capital gains tax liability is:

• The annual exempt amount and the capital losses are set against the chargeable gain on the sale of the freehold warehouse because this does not qualify for business asset disposal relief.
• £29,700 (37,700 – 8,000) of Mika’s basic rate tax band is unused, but this is set against the gains qualifying for business asset disposal relief.

Where the £1 million lifetime limit is exceeded, gains in excess of the limit will be subject to the normal rates of capital gains tax.

EXAMPLE 31
On 10 December 2022, Raj sold a 45% shareholding in Splash Ltd, an unquoted trading company. The disposal resulted in a chargeable gain of £1,300,000 which qualifies for business asset disposal relief. Raj is a higher rate taxpayer and has not made any previous disposals qualifying for relief.

Raj’s capital gains tax liability is:

Investors' relief

Investors’ relief effectively extends business asset disposal relief to external investors in trading companies which are not listed (unquoted) on a stock exchange.

However, investors’ relief has its own separate £10 million lifetime limit (compared to the business asset disposal relief lifetime limit of £1 million). Qualifying gains are taxed at a rate of 10%. To qualify for investors’ relief, shares must be:

• Newly issued shares acquired by subscription after 17 March 2016, and
• Owned for at least three years after 6 April 2016.

With certain exceptions (such as being an unremunerated director) the investor must not be an employee or a director of the company whilst owning the shares.

EXAMPLE 32
On 20 June 2019, Winnie subscribed for 150,000 £1 ordinary shares (a 2% shareholding) in Unquote Ltd, an unquoted trading company, at their par value.

She has never been an employee or director of the company. Winnie sold the 150,000 shares in Unquote Ltd for £760,000 on 15 December 2022.

Winnie’s shareholding in Unquote Ltd does not qualify for business asset disposal relief because the 5% shareholding condition is not met and she was not an employee or director of the company. However, the conditions for investors’ relief are met, including the three-year holding period requirement.

Winnie’s capital gains tax liability is:

The capital gains tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

Capital gains tax: tax rates

Capital gains tax: Business asset disposal relief and investors’ relief

Inheritance tax

Rates of inheritance tax

The nil rate band for the tax year 2022–23 is unchanged at £325,000.

A residence nil rate band applies where a main residence is inherited on death by direct descendants (children and grandchildren). For the tax year 2022–23, the residence nil rate band is also unchanged at £175,000.

The residence nil rate band is only relevant where an individual dies on or after 6 April 2017 and their estate includes a main residence. Any other type of property, such as a property which has been let out, does not qualify for the residence nil rate band.

EXAMPLE 33
Sophie died on 26 May 2022 leaving an estate valued at £850,000. Under the terms of her will, Sophie’s estate was left to her children. The estate included a main residence valued at £325,000.

The inheritance tax (IHT) liability is:

The residence nil rate band of £175,000 is available because Sophie’s estate included a main residence and this was left to her direct descendants.

In the same way in which any unused normal nil rate band can be transferred to a surviving spouse (or registered civil partner), the residence nil rate band is also transferable. It does not matter when the first spouse died.

EXAMPLE 34
Timothy died on 19 June 2022 leaving an estate valued at £860,000. Under the terms of his will, Timothy’s estate was left to his children. The estate included a main residence valued at £450,000.

Timothy’s wife died on 5 May 2011. She used all of her nil rate band.

Timothy’s IHT liability is:

• Timothy’s personal representatives can claim his deceased wife’s unused residence nil rate band of £175,000.
• The amount of residence nil rate band is therefore £350,000 (175,000 + 175,000).

The value of the main residence is after deducting any repayment mortgage or interest-only mortgage secured on that property.

If a main residence is valued at less than the available residence nil rate band, then the residence nil rate band is reduced to the value of the residence.

EXAMPLE 35
Una died on 10 July 2022 leaving an estate valued at £625,000. Under the terms of her will, Una’s estate was left to her children. The estate included a main residence valued at £225,000 on which there was an outstanding interest-only mortgage of £130,000.

Una’s IHT liability is:

The value of Una’s main residence is £95,000 (225,000 – 130,000), so the residence nil rate band is restricted to this amount.

The residence nil rate band does not apply to lifetime transfers becoming chargeable as a result of the donor’s death within seven years.

EXAMPLE 36
Maud died on 22 April 2022 leaving an estate valued at £775,000. Under the terms of her will, Maud’s estate was left to her grandchildren. The estate included a main residence valued at £435,000.

On 30 April 2020, Maud had made a potentially exempt transfer of £400,000 (after the deduction of annual exemptions) to her son.

IHT liabilities are:

Given that the residence nil rate band is only available where inheritance is by direct descendants, rearranging the terms of a will can save IHT.

EXAMPLE 37
Victor has an estate valued at £1,400,000, including a main residence valued at £550,000. He has not made any lifetime gifts. Victor’s wife died on 17 May 2012 and all of her estate was left to Victor. Under the terms of his will, Victor has left his main residence to his brother, with the residue of the estate left to his children.

Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000). The residence nil rate band is not available because the main residence will not be inherited by a direct descendant.

Victor could amend the terms of his will so that his brother inherited £550,000 of other assets, with the main residence being included within the residue. A residence nil rate band of £350,000 (175,000 + 175,000) would then be available, saving IHT of £140,000 (350,000 at 40%).

There is no reason why Victor’s brother could not purchase the main residence from the children following Victor’s death.

A question will make it clear if the residence nil rate band is available. Therefore, you should assume that the residence nil rate band is not available if there is no mention of a main residence.

The inheritance tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

Where earlier nil rate bands may be relevant, they will be given to you within the question.

Corporation tax

Rate of corporation tax

For the financial year 2022, the rate of corporation tax is unchanged at 19%. This rate applies regardless of the level of a company’s profits.

You may be aware of planned future increases to the rate of corporation tax. Please note that this will not apply for the tax year 2022–23, as it is due to commence from 1 April 2023. It is therefore not examinable for exams in the period 1 June 2023 to 31 March 2024.

EXAMPLE 38
For the year ended 31 March 2023, Simplified Ltd has taxable total profits of £600,000.

Simplified Ltd’s corporation tax liability is £114,000 (600,000 at 19%).

The corporation tax information which will be given in the tax rates and allowances section of the examination for exams in the period 1 June 2023 to 31 March 2024 is:

Corporation tax

Enhanced capital allowances for companies only

For a two-year period from 1 April 2021 to 31 March 2023, companies can benefit from enhanced capital allowances when they purchase new plant and machinery:

• For expenditure which would fall into the main pool, there is a 130% super deduction. This means that for every £100 of expenditure, a first year allowance of £130 is available.
• For expenditure which would fall into the special rate pool, there is a 50% first year allowance.

For expenditure falling into the main pool, the 130% super deduction should be claimed rather than the 100% annual investment allowance. However, for expenditure falling into the special rate pool, the 100% annual investment allowance should be claimed in preference to the 50% first year allowance.

Enhanced capital allowances are not available to sole traders or partnerships. Only expenditure on new plant and machinery qualifies, not expenditure on second-hand assets. Cars do not qualify.

A question will not be set in exams in the period June 2023 to March 2024, involving the disposal of plant and machinery on which these enhanced capital allowances have been claimed, or where enhanced capital allowance expenditure is incurred in an accounting period spanning 31 March 2023.

EXAMPLE 39
Hance Ltd has an accounting reference date of 31 March each year. On 1 April 2022, the tax written down value of plant and machinery in the company’s main pool and special rate pool is £0.

During the year ended 31 March 2023, Hance Ltd purchased new equipment for £1,650,000, of which £350,000 is main pool expenditure and £1,300,000 is special rate pool expenditure.

Hance Ltd’s capital allowance claim for the year ended 31 March 2023 is:

Administration

Late payment interest and repayment interest

The assumed rates of late payment interest and repayment interest on underpaid and overpaid income tax, class 4 NIC, capital gains tax and corporation tax are based on the actual rates in force (for income tax purposes) at 6 April 2022. For exams in the period 1 June 2023 to 31 March 2024, the assumed rate of late payment interest will therefore be 3.25% and the assumed rate of repayment interest will be 0.5%. Note that the rate of late payment interest (3.25%) is not the same as the official rate of interest (2%).

Value added tax (VAT)

Penalties for late payment and late submission

New late payment and late submission penalties will be introduced from 1 January 2023 to replace the default surcharge system. However, for exams in the period 1 June 2023 to 31 March 2024, it will be assumed that the existing default surcharge system continues to apply.

Registration and deregistration limits

The limit of annual turnover above which VAT registration is compulsory is unchanged at £85,000. The deregistration limit is also unchanged at £83,000.

Standard rate of VAT

The standard rate of VAT is unchanged at 20%.

EXAMPLE 40
Gwen is in the process of completing her VAT return for the quarter ended 31 March 2023. The following information is available:

• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
• Standard rated materials amounted to £32,400.
• Standard rated expenses amounted to £24,800.
• On 15 February 2023, Gwen purchased machinery at a cost of £24,150. This figure is inclusive of VAT.

Unless stated otherwise, all of the above figures are exclusive of VAT.

Recent government announcements

The Energy Profits Levy was introduced on 26 May 2022. For the avoidance of doubt, as we do not examine the existing oil and gas tax regime we will not be examining those changes announcing the introduction of a temporary energy profits levy and related investment allowance.

Written by a member of the TX–UK examining team