Page 17 - Budget Newsletter - March 2023

A corollary of the harsher treatment of corporate profits and dividends is that the tax incentive for
sole traders and partners to incorporate will not be as strong in 2023/24 as it was in earlier years.
However, incorporation is not just about tax and is an area where expert advice is essential.

…Or nothing at all?

For some business owners, the ultimate way to limit their tax bill is to choose to leave profits in the
company rather than draw them either as dividend or salary. With the top rate of income tax
currently at 45% (47% in Scotland from 2023/24) - and marginal rates potentially much higher -
there is an obvious argument for allowing profits to stay within the company, where the maximum
marginal tax rate from April will be 26.5%.

This strategy has tax risks in terms of eligibility for business asset disposal relief and IHT business
relief. There is also a risk that further reform or abolition of CGT business asset disposal relief (the
former entrepreneurs’ relief) could increase tax payable, or there could be moves to re-characterise
accumulated profits as income for tax purposes on liquidation or sale of the company. IHT reform
might also have an impact. Money left in the company is also money exposed to creditors, so
professional advice should be sought before turning a business into a money box.

Planning Point

The abolition of the LTA and higher annual allowance may reopen the opportunity to make
pension contributions that was closed off, possibly many years ago.

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