As well as a mechanism for collecting revenue, the tax system is also used to encourage certain behaviours and discourage others. Once example  where this is evident is in the way in which company cars are taxed. To encourage company car drivers and their employers to make environmentally-friendly choices, the taxable amount increases as the car’s CO2 emissions increase. The financial incentive to opt for an electric or ultra-low emission car is significant – a higher rate taxpayer will pay tax of just £240 on an electric company car costing £30,000, while the tax hit on a car with the same list price but emissions of 160g/km or more is £4,440.

Tax advantages of electric cars

The tax system confers a number of tax advantages on electric and ultra-low emission cars.

For 2022/23, 2023/24 and 2024/25, electric cars are taxed on 2% of their list price. The charge for ultra-low emission cars depends on their electric range, with the charge for cars in the 1—50g/km emissions bracket ranging from 2% for those with an electric range of at least 130 miles to 14% for those with an electric range of less than 30 miles. At the other end of the scale, the charge for petrol cars with CO2 emissions of 160g/km and above is 37% of the list price.

Employers can also pay for the electricity for private mileage in an electric company car without the employee suffering a fuel benefit charge as HMRC do not regard electricity as a ‘fuel’ for these purposes. By contrast, if fuel is provided for private mileage in a petrol or diesel company car, a fuel benefit charge arises, found by multiply the appropriate percentage for the car’s CO2 emissions by the multiplier for the year. As this is set at £25,300 for 2022/23, rising to £27,800 for 2023/24, the potential savings of going electric are again significant.

Employees using their own electric car for work can also benefit, as if their employer has workplace charging facilities, they can charge their car at work without any tax consequences.

Employers too benefit from choosing electric cars for their car fleet as they are able to claim a 100% first-year capital allowance if they purchase electric cars. A first-year allowance of 100% is also available for electric charge points until 31 March 2023 (corporation tax/1 April 2023 (income tax). Companies can also benefit from the 130% super-deduction on charging points where the expenditure is incurred before 1 April 2023.

Electric cars are exempt from vehicle excise duty until April 2025.

Looking ahead

In the 2022 Autumn Statement, the Chancellor announced that some of the tax advantages for electric cars are to be reduced. The OBR estimate that by 2025 at least half of new cars will be electric; consequently, there is less need for tax incentives (while the Government will still need to preserve their revenue stream).

From April 2025, the appropriate percentage for electric cars and ultra-low company cars is to be increased, rising by one percentage point for each of the tax years, 2025/26, 2025/27 and 2027/28. This means that electric cars will be taxed on 3% of their list price in 2025/26, on 4% of their list price for 2026/27 and on 5% of their list price for 2027/28. Despite the increases, an electric company car remains a tax efficient benefit – assuming the higher rate remains at 40% in 2027/28, the tax bill for a £30,000 electric car will still only be £600.

Entitlement to the state pension and certain contributory benefits depends on an individual having paid, or been credited with, sufficient National Insurance contributions.

To qualify for the full single-tier state pension, an individual needs 35 qualifying years. A reduced state pension is paid where a person has less than 35 qualifying years, but at least 10.

There are different Classes of National Insurance contribution and the Class paid depends on whether an individual is employed or self-employed. A further Class, Class 3, can be paid voluntarily where an individual wants to top up their contribution record.

Self-employed earners

Although self-employed earners are required to pay both Class 2 and Class 4 National Insurance contributions once their profits reach the relevant thresholds, it is only the payment of Class 2 that counts towards their state pension entitlement.

Class 2 contributions are weekly flat-rate contributions which must be paid by self-employed earners whose earnings exceed the relevant threshold.

For 2022/23 and later tax years, Class 2 National Insurance contributions are payable once profits exceed a new threshold, the lower profits threshold. This is aligned with the lower profits limit for Class 4 contribution and for 2022/23 is £11,908. This means that the starting point for Class 2 and Class 4 contributions is now the same. Where profits are at or above this level, the contributor must pay Class 2 contributions. For 2022/23 these are at rate of £3.15 per week. Class 2 contributions are paid through the self-assessment system with tax and Class 4 contributions. Where the earner has been self-employed throughout 2022/23 Class 2 contributions for the year are payable in a lump sum of £163.80 (52 weeks at £3.15 per week) by 31 January 2024.

Where earnings from self-employment are between the small profits threshold, set at £6,725 for 2022/23, and the new lower profits threshold, for 2022/23 onwards the self-employed earner is treated as having paid Class 2 contributions at a zero rate. The effect of this is that the year counts as a qualifying year for state pension and benefit purposes despite the earner having paid no actual Class 2 contributions. This places a self-employed earner with low earnings in a similar position to an employed earner with low earnings. For 2021/22 and previous tax years, Class 2 contributions were payable at the usual weekly rate once earnings reached the small profits limit.

A self-employed earner with profits below the small profits threshold does not benefit from notional contributions, and unless they pay another Class or receive National Insurance credits, they will need to pay sufficient voluntary contributions for the year to be a qualifying year.

While a self-employed earner whose earnings are below the small profits threshold is not obliged to pay Class 2 National Insurance contributions, they are entitled to. This opens up a low cost route to securing a qualifying year, as paying Class 2 contributions at £3.15 per week for 2022/23 is far cheaper than paying voluntary Class 3 contributions at £15.85 per week – an annual saving of £660.40.

Is it worthwhile?

Whether paying Class 2 contributions is worthwhile will depend on an individual’s circumstances. If they already have 35 qualifying years, or expect to do so without making voluntary contributions by the time that they reach state pension age, there is nothing to be gained from paying Class 2 contributions voluntarily. You can check your state pension entitlement via the HMRC app or online at www.gov.uk/check-state-pension.

Where a person also has a job and will pay Class 1 National Insurance contributions on earnings equal to 52 times the weekly lower earnings limit (£6,396 for 2022/23), they will secure a qualifying year from the payment of Class 1 contributions. Likewise, if an individual receives National Insurance credits, for example, because they are registered for child benefit for a child under the age of 12, it will not be worthwhile paying voluntarily Class 2 National Insurance contributions.

However, where a person has less than 35 qualifying years and is looking to build up their state pension entitlement, serious consideration should be given to paying Class 2 contributions. At 2022/23 rates, each additional qualifying year increases the state pension by £5.29 per week. For a cost of £3.15 a week, this is definitely worthwhile.

The VAT default surcharge is being replaced with a new VAT penalty and interest regime. The new rules apply to VAT accounting periods beginning on or after 1 January 2023.

Late filing penalties

The new penalty regime operates on a points-based system. Each VAT return received late, including nil and repayment returns, will receive one late submission penalty point. A penalty will be charged when the points reach a certain threshold. The penalty trigger depends on the frequency with which returns are submitted.

Submission frequency	Penalty points threshold	Period of compliance
Annually	2	24 months
Quarterly	4	12 months
Monthly	5	6 months

Once the penalty threshold is reached, a penalty of £200 is charged. Further penalties of £200 are charged for each subsequent late submission.

The points total can be reset to zero if all returns are submitted on or before the due date for the period of compliance and all returns due for the previous 24 months have been submitted to HMRC.

Late payment penalties

A penalty may also be charged if VAT owed to HMRC is paid late. The penalty depends on how late the payment is made.

No penalty is charged if payment is made within 15 days of the due date. If payment is made between 16 and 30 days after the due date, a penalty equal to 2% of the VAT owing at day 15 is charged.  Where payment is made 31 days or more after the due date, the penalty charged is equal to 2% of the VAT owing at day 15 plus 2% of the VAT owing at day 31. Where a time to pay agreement is agreed, penalties are calculated by reference to the date on which the arrangement is made.

A further penalty is charged when the balance is cleared or a time to pay arrangement agreed. This is calculated at a daily rate of 4% a year for the duration of the debt.

To allow traders time to become familiar with the new rules, late payment penalties will not be charged during the first year (1 January 2023 to 31 December 2023) where payment is made in full within 30 days of the due date.

Late payment interest

From 1 January 2023, late payment interest will be charged on late paid VAT from the due date until the date payment is made in full. Late payment interest is charged at a rate equal to the Bank of England bank base rate plus 2.5%.

Repayment interest

The repayment supplement is withdrawn from 1 January 2023. Instead, for accounting periods beginning on or after 1 January 2023, HMRC will pay repayment interest on VAT that they owe. The interest period will run from the due date (or date the VAT was submitted if this is later) to the date that payment is made in full by HMRC.

Repayment interest is paid at a rate equal to the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.

The dividend allowance is available in addition to the personal allowance. It allows all taxpayers regardless of the rate at which they pay tax to receive dividends up to the level of the dividend allowance free of any personal tax. This is in addition to any dividends sheltered by the personal allowance which are also received free of tax.

The dividend allowance has been a useful planning tool for family companies; where family members are shareholders, paying dividends to utilise any available dividend allowance increases the profits that can be extracted tax-free.

However, the dividend allowance, currently set at £2,000, is to be reduced. It will fall to £1,000 for 2023/24 and to £500 for 2024/25. The reduction will affect personal and family companies who extract profits as dividends, and also those who receive dividend income from investments in shares.

Taxation of dividends

Dividends have their own rates of tax, which are lower than the income tax rates. They also benefit from a dedicated allowance – the dividend allowance. Although termed an allowance, it is really a nil rate band, and dividends covered by the allowance are taxed at a zero rate. However, the allowance uses up the part of the tax band in which it falls, with dividends being taxed as the top slice of income.

The dividend tax rates were increased by 1.25% from 2022/23 as part of a package of measures brought in alongside the now cancelled Health and Social Care Levy. Despite the cancellation of the levy and the reversal of the associated temporary National Insurance rises, the dividend tax rates are to remain at their 2022/23 rates whereby dividends are taxed at 8.75% where they fall within the basic rate band, at 33.75% where they fall within the higher rate band and at 39.35% where they fall within the additional rate band.

Impact of reduced dividend allowance

Taxpayers who receive dividend income in excess of £1,000 which is not sheltered by the personal allowance will feel the effect of the reduction in the dividend allowance. Where dividend income is at least £2,000 in 2022/23 and 2023/24, the extra tax paid by a basic rate taxpayer on their dividend income in 2023/24 is £87.50; for a higher rate taxpayer the increase is £337.50 and for an additional rate taxpayer, it is £393.50.

Family companies

Dividends can only be paid from retained profits and must be paid in proportion to shareholdings.

A popular strategy in a family company is to use an alphabet share structure whereby each family member has their own class of share (A shares, B shares, etc.). This allows dividends to be tailored to utilise unused dividend allowances and basic rate bands. The fall in the dividend allowance will reduce the extent to which this strategy can be used to extract profits tax-free. Family and personal companies will need to review their profit extraction strategies as a result.

Where company profits are more than £50,000, the corporation tax increases from April 2023 will reduce the post-tax profits available for distribution as a dividend, and the reduced dividend allowance will increase the tax payable by shareholders  where those profits are extracted as dividends. These changes will reduce the post-tax profits available for use by the shareholders outside the company.

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To help businesses that suffered losses during the Covid-19 pandemic, temporary measures were introduced to increase the period for which certain losses could be carried back. This is helpful as it enables businesses to obtain relief for those losses earlier, generating a useful tax repayment at times when the business may be suffering from cash flow difficulties.

Relief is available to both unincorporated business and companies, although the mechanics of the relief is different. To take advantage of the extended carry back period, the relief must be claimed by the relevant deadline.

Unincorporated businesses

The extended carry-back rules apply to losses for the 2020/21 and 2021/22 tax years. Under the rules, unrelieved losses can be carried back and set against profits from the same trade for the three years before the tax year of the loss. The extended rules apply where a claim has been made to relieve the loss against the general income of the year of the loss and/or the previous tax year, and the loss has not been fully relieved by that claim. Losses carried back under the extended rules are set against the trading profits of a later tax year before that of an earlier tax year. Losses carried back under the extended rules are capped at £2 million for each loss-making tax year within the scope of the relief.

If a business wishes to use the extended carry-back rules in respect of a 2020/21 loss, it must claim by 31 January 2023. The deadline to claim relief for a 2021/22 loss under the extended carry back rules is 31 January 2024. Claims are normally made in a tax return, but a stand-alone claim can be made where the claim affects more than one tax year.

Example

A sole trader makes a loss in 2020/21. He has no other income in that year. He makes a claim for sideways relief to carry back the loss against his general income for 2019/20. If he wishes to take advantage of the extended carry-back rules to carry back any unrelieved loss against trading profits of 2018/19 and, where loss is not fully relieved, against trading profits of 2017/18, he must claim by 31 January 2023.

It should be noted that the claim cannot be tailored to prevent personal allowances from being wasted. Where this will occur, consideration should be given to whether it would be preferable to carry the loss forward instead and set it against future trading profits.

Companies

Under normal rules, a company can carry back a loss for an accounting period back one year against the profits of the previous accounting period. Under the extended carry-back rules, losses for accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back up to three years. Losses must be set against the profits of a more recent accounting period before those of an earlier accounting period. A cap of £2 million applies to losses for accounting periods ending between 1 April 202 and 31 March 2022 which can benefit from the extended carry-back. A separate £2 million cap applies to losses for the accounting period ending between 1 April 2021 and 31 March 2022.

Claims must be made within two years of the end of the accounting period in which the loss arose.

Example

A company prepares accounts to 31 March each year. It made a loss in the year to 31 March 2021. Under normal rules, the loss can be carried back against profits for the year to 31 March 2020. If the loss is unrelieved, a claim can be made under the extended carry back rules to set the loss first against the profits of the year to 3 March 2019 and, if still not fully relieved, against the profits of the year to 31 March 2018.

The claim must be made by 31 March 2023.

In a climate of rising interest rates and rising inflation, every penny is likely to count. For working parents, help with their childcare costs is welcome. The tax-free childcare system can provide up to £2,000 a year tax-free.

Tax-free childcare

The Government’s tax-free childcare scheme allows working parents to open an online childcare account to pay for their childcare costs and receive a tax-free top-up from the Government on the amount that they deposit in the account. The top-up is worth 25% of the amount deposited to a maximum of £500 a quarter (£2,000 a year). This means that every £80 deposited by the parent pays for £100 of childcare costs until the cap is reached. A parent paying £667 a month into the account will receive the maximum top up.

If the child is disabled, the maximum top-up is doubled to £1,000 a quarter (£4,000 a year).

The money in the childcare account can only be used to pay for approved childcare, such as that provided by a childminder, nursery nanny or by an after-school club or play scheme. The childcare provider must be signed up to the scheme.

Eligibility

To be eligible for the tax-free top-up, a parent must be working, on sick or annual leave or maternity, paternity or adoption leave. A parent may also be eligible if their partner is working and they are on certain benefits and are re-starting work within the next 31 days.

The parent must also pass an income test. Over the next three months, the parent and their partner if they have one must earn at least:

• £1,967 where they are aged 23 or over;
• £1,909 where they are aged 21 or 22;
• £1,420 where they are aged 18 to 20; or
• £1,000 if they are under 18 or an apprentice.

This is equivalent to 16 hours a week at the relevant National Living or Minimum Wage. Dividends, interest, income from property and pension payments are not taken into account. Where a person is not paid regularly, average income over the year can be used.

The child

The childcare provided with the money from a tax-free childcare account must be for a child aged 11 or under living with the claimant. Eligibility ceases from 1 September following the child’s 11^th birthday. Where the child is disabled, they must be under the age of 17.

Exclusions

The tax-free childcare top-up cannot be claimed at the same time as universal credit, working tax credit or child tax credit. Employees who joined their employer’s childcare voucher or supported childcare scheme on or before 4 October 2018 cannot benefit from both tax relief under the scheme and tax-free childcare.

Where more than one source of help is available, it is advisable to do the sums to see which is most beneficial.

In a partnership, profits and losses are shared between the partners in accordance with the profit sharing ratio. This may be fixed, for example, three partners may agree to share profits in the ratio of 40:35:2; but it does not have to be. Instead, the partners can simply agree to share profits and losses in such proportions as is agreed between them.

A fixed profit sharing ratio has the advantage of certainty as each partner knows at the outset what their share of the profits will be. It also enables the partners to agree up front on an allocation with which they are happy, and which is transparent. However, this may not be the best option from a tax perspective. By contrast, a flexible profit sharing ratio whereby partners agree on the profit allocation each year according to their personal circumstances will allow them to minimise their combined tax bill. While this is unlikely to be acceptable where the partners only have a professional relationship with each other, where there is a personal relationship, for example, if the partners are married or in a civil partnership, a flexible profit sharing ratio can be advantageous from a tax perspective.

Example

Anne and Bill are married and in partnership. They agree to share profits and losses in such proportion as is agreed between them.

In 2021/22, Anne also has a job from which she earns £35,270. Bill’s only income is from the partnership.

The partnership makes a profit of £70,000. Taking account of their personal circumstances, they agree to share the profits in the ratio 2:5, so that Anne receives profits of £20,000 and Bill receives profits of £50,000.

Anne pays tax of £4,000 on her profits (£20,000 @ 20%).

Bill pays tax of £7,846 (20% (£50,000 – £12,570)).

Their combined tax bill is £11,846. If they had shared profits equally, the combined tax bill would have been £14,846 as £15,000 of the profits would have been taxed at 40% rather than 20%.

Anne retired from her job on 1 April 2022. In 2022/23 her only income is from the partnership. However, Bill undertakes a consultancy role from which he earns £40,000. The profits from the partnership are £60,000 for 2022/23. As their circumstances are different this year, it is better from a tax perspective to share profits in the ratio of 5:1, so that Anne receives profits of £50,000 on which she pays tax of £7,846 and Bill receives profits of £10,000 on which he pays tax of £2,000 – a combined tax bill of £9,846.

Had they continued to share profits in the ratio 2:5, Anne would have received profits of £17,143 on which she would have paid tax of £914.60 and Bill would have received profits of £42,857 on which he would have paid tax of £14,168.80, and their combined tax bill would have been £15,083.40. By adopting a flexible profit sharing ratio, they can reduce their combined tax bill by over £5,000.

The Annual Investment Allowance will now remain at £1 million permanently rather than reverting to £200,000 from 1 April 2023. This change of plan may mean that businesses will want to consider their capital expenditure plans. However, companies wishing to take advantage of the time-limited super-deduction and 50% first-year allowance will need to ensure that they incur the qualifying expenditure by the 31 March 2023 deadline.

Annual Investment Allowance

The Annual Investment Allowance (AIA) allows 100% relief for qualifying expenditures up to the AIA limit. Both companies and unincorporated businesses can benefit from the allowance. Whilst most expenditure on plant and machinery qualifies, there are exclusions, the main one being cars.

The news that the AIA limit will now remain at £1 million is good news. However, businesses that were rushing to meet the 31 March deadline or delaying capital expenditure to avoid being caught under the harsh transitional rules that would have applied had the limit reverted to £200,000 from 1 April 2023 may now wish to revisit their plans.

The transitional rules that would have applied where an accounting period spanned 31 March meant that capital expenditure incurred in the period from 1 April 2023 to the end of the accounting period may not have benefitted for the AIA in full, despite being within the AIA limit for the period of a whole. There is now no need to avoid incurring capital expenditure in this period as the cap is no longer relevant. Consequently, expenditure can be delayed beyond 31 March 2023 without losing the AIA.

Also, businesses planning significant investment can now benefit from an AIA limit of £1 million a year beyond 31 March 2023. Consequently, where cash flow is tight, the pressure to meet a 31 March 2023 deadline to benefit from the AIA on qualifying expenditure up to £1 million is removed.

Companies

In addition to the AIA, companies can also benefit from alternative claims for qualifying expenditures incurred in the period from 1 April 2021 to 31 March 2023. Where the expenditure would normally qualify for main rate writing down allowances of 18%, a super-deduction of 130% of the expenditure can be claimed instead. A lower 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances at 6%. This will be beneficial where the AIA limit has been used and is likely also to be used in future accounting periods, otherwise, the AIA gives relief at a higher rate.

Review expenditure and optimise claims

Business should review their capital expenditure claims and consider, where possible, how expenditure can be timed to maximise reliefs. Remember, the AIA, super-deduction and 50% first-year allowance do not need to be claimed or claimed for the full amount of the expenditure. Writing down allowances can be claimed for expenditures not relieved under these routes.

While the permanent increase in the AIA limit has removed some deadline pressure, companies wanting to take advantage of the super-deduction will need to incur the expenditure on or before 31 March 2023 to benefit from the generous 130% relief that it provides.

If you need to file a self-assessment tax return for 2021/22, you must do this online by 31 January 2023 if you want to avoid a late filing penalty. However, if you received your notice to file a tax return after 31 October 2022, a later deadline applies; you must file the return within three months of the date of the notice to file.

You must also pay any remaining tax that you owe for 2021/22 by 31 January 2023. If you are self-employed, this is also the deadline for paying Class 2 and Class 4 National Insurance for 2021/22. Where your tax and Class 4 National Insurance liability for 2021/22 is at least £1,000, you must also make your first payment on account for 2021/22 by the same date, unless at least 80% of your tax liability for the year is collected at source, for example, under PAYE.

The need to pay any remaining tax and National Insurance for 2021/22 plus the first payment on account for 2022/23 by 31 January may present something of a financial challenge, particularly given the cost of living crisis. However, if you have a source of income that is taxed under PAYE, there is a way to spread the cost without the need to agree to a Time to Pay arrangement —  by opting to pay your self-assessment bill through PAYE. However, there are certain eligibility conditions to be met, and you must also file your 2021/22 tax return online by the earlier date of 30 December 2022.

Am I eligible?

You can pay your self-assessment tax bill for 2021/22 through PAYE if:

• you owe less £3,000 on your tax bill;
• you already pay tax through PAYE (for example, on employment or on a pension);
• you submitted your 2021/22 tax return online by 30 December 2022 or you filed a paper tax return by 31 October 2022.

However, you will not be able to choose this route if:

• your PAYE income is insufficient to collect the tax that you owe (in addition to the tax on that income);
• as a result of the adjustment, you would pay more than 50% of your PAYE income in tax;
• collecting self-assessment tax through PAYE would more than double the tax paid in this way; or
• your tax bill was more than £3,000 but was reduced below this amount as a result of payments on account.

If you owe more than £3,000, you cannot use this option – it is not possible for £3,000 to be collected under PAYE and the balance to be paid by 31 January. However, if you are struggling to pay, you could consider setting up a Time to Pay arrangement to spread the cost.

Where you elect to pay your 2021/22 self-assessment tax bill through PAYE, your 2023/24 tax code will be adjusted to collect the tax throughout the 2023/24 tax year. This effectively allows you to spread the cost over 12 months and pay in interest-free instalments. In a climate of rising interest rates, this is an attractive option (although on the downside, it will reduce your take-home pay each month).