This year has so far been relatively straight forward on the tax side of things. Some allowances frozen (until 2028), Capital Gains Tax allowance being reduced over time, interesting tweaks to pension allowances and a change to corporation tax, but otherwise – last year (2022) was the year of multiple ‘political’ Budgets.
The Standard annual pension contribution allowance increased from £40,000 to £60,000 and the lifetime allowance charge was removed, from 6 April 2023. Those in business may change what they do with the business profits, and how they access them. This highlights the need with personal injury claims to gather appropriate evidence about how higher earning claimants (particularly those with businesses) managed their finances and used or may have used pension planning to reduce their income tax bill.
In more recent years there has been a flat rate of Corporation Tax of 19%. From April 2023 there will be:
- A main rate of corporation tax of 25% for companies with profits of £250,000 or more (the 25% tax rate applies to all of the profits;
- A small profits rate of 19% for companies with profits of £50,000 or less;
- The main tax rate will taper in between profits of £50,000 and £250,000.
Also beware the thresholds are apportioned where there are Associated Companies.
If profits fall between the two profit thresholds (£50,000 to £250,000) then the company is entitled to Marginal Small Companies Relief (MSCR). This has the impact of applying an interesting marginal rate of Corporation Tax on profits falling between £50,000 and £249,000 of 26.5%.
It may well be the situation with personal injury losses where the Claimant trades via a limited company, that one is looking to apply the ‘marginal’ tax rate as a deduction from the loss. So, where company profits are already above £50,000 then the marginal corporation tax rate for the next chunk of profits (up to a total of £250,000) will be 26.5%! As always, the devil will be in the detail.
Again, this change in taxation of companies may give rise to changes in how profits are withdrawn from businesses, which may be relevant to personal injury loss quantum, with certain types of claim.
Always happy to talk through the tax deductions on any claims you are working on. Just get in touch.
Inflation can impact in several ways on earning loss claims. The Consumer Prices Index (CPI) rose by 10.1% in the 12 months to March 2023.
With inflation running relatively high, it is always worth tweaking the numbers in loss calculations right up to the trial date.
Also, many occupational pension schemes have inflation uplift clauses (for accrued pension benefits and for pensions in payment) – so it is important to keep a close eye on the impact of inflation on the pension loss calculations with, for example, Public Sector pensions.
At Formby Forensics, we’re passionate about helping our clients and we’d love to chat with you about the best approach to take. Don’t hesitate to reach out – we’re always happy to help!
Richard Formby FCA MAE