Many of the 2013/14 tax rates, bands and allowances were pre-announced, and others have been updated following Budget 2013.
You can access the 2012/13 tax rates here.
All limited company contractors pay Corporation Tax on their annual profits. The small profits’ tax rate (which applies to companies that turnover £300k or less p.a.) remains at 20% for the 2013/14 tax year.
The main rate (paid by companies that turnover £1.5m or more) will continue its journey from 28% when the Coalition took over to a mere 20% in April 2015.
The Chancellor announced another steep rise in the personal allowance, below which no income tax is payable. The personal allowance for 2013/14 is £9,440. This will rise to £10,000 in April 2014 (a year earlier than expected).
Of course, in order to fund this rise, the Chancellor has once again lowered the higher rate tax threshold, and thanks to the effects of fiscal drag (where tax thresholds remain the same, but inflation erodes the value of earnings), a record number of people will now be forced into the higher rate tax band.
For the 2013/14 tax year, the 40% higher rate tax band applies to income over £32,010 (on top of the personal allowance). The basic 20% rate applies to all income falling between the personal allowance and the higher rate band.
The additional 45% band applies to income over £150,000 (a controversial cut from the 50% rate created by Labour in their final months in power).
If you earn £100,000 or more, your personal allowance will also be eroded by £1 for every £2 you earn above this threshold. As a result, you will pay a high marginal rate of tax (60%) on income received between £100,000 and £118,880 in the 2013/14 tax year.
All contractors pay Class 1 National Insurance Contributions (NICs) on salaried income received above the prevailing threshold. Both employers and employees are payable on NICs.
For the 2013/14 tax year, Employers’ NICs are payable at a rate of 13.8% on income of £148 or more per week.
Employees’ NICs are payable 12% on income between £149 and £797 per week, and 2% on income above this amount.
From April 2014, the Chancellor announced a new Employment Allowance which will repay the first £2,000 of Employers’ NICs paid by all businesses in the UK. This is unlikely to be of much benefit to limited company contractors, who typically pay themselves small salaries, as you would have to raise your salary significantly to benefit from the new allowance. Subsequently, you would have to pay additional income tax and Employees’ NICs on this extra income – cancelling out NIC savings provided by the Employment Allowance.
Tax on Dividends
Dividends are taxed at the rate of 10% (basic rate), 32.5% (higher rate) and 37.5% (additional rate); these rates apply to income which falls into the standard income tax bands described above.
However, shareholders receive a 10% tax credit on all dividend income, so there is no further tax to pay on dividend income which falls beneath the higher rate threshold.
Higher rate taxpayers pay an effective rate of 25% on all dividend income (after the 10% tax credit is taken into account), and additional rate taxpayers pay an effective rate of 30.55% on dividend income received above £150,000.
Other Taxes / Allowances
Here are some further relevant tax rates and allowances. For a comprehensive list of allowances (including small business rates, Stamp Duty and further NIC rates, visit HMRC).
- The VAT registration threshold from 1st April 2013 is £79,000. The deregistration threshold rises to £77,000.
- The Inheritance Tax Threshold (IHT) remains at £325,000. Above this threshold, all assets are taxed at 40%.
- The Capital Gains Tax (CGT) allowance for 2013/14 is £10,900.
- You can invest up to £11,520 in an ISA during 2013/14; up to half of this sum can be invested in cash.
- You can receive tax relief on pension contributions up to £50k during the 2013/14 tax year, subject to a lifetime allowance cap of £1.5m. These two figures will be cut to £40k and £1.5m respectively from April 2014 following changes announced in the 2012 Autumn Statement.
Please check with your accountant before relying on any information and data provided within this article.