The outlook changes significantly with recent and forthcoming changes:
- change to corporation tax rate for some companies
- fall in the Dividend Allowance from 6 April 2023
- higher rates of income tax on dividends introduced in 2022 set to continue
- fall in additional rate (top rate in Scotland) threshold from 6 April 2023.
Corporation tax
From 1 April 2023, the main rate of corporation tax rises to 25%. Not every company will pay at this rate, however. Profits exceeding £250,000 will be charged at the main rate, but a small profits rate of 19% applies where profits do not exceed £50,000. Companies with profits under this level, therefore, effectively see no change. For companies with profits between£50,000 and £250,000, the tax rate is tapered. These companies pay at the main rate reduced by marginal relief: essentially, the tax rate increases from 19% to 25% depending on the level of profits. Limits are adjusted where there are associated companies. HMRC has created an online tool to demonstrate how marginal relief works: this can be accessed on gov.uk, by searching for ‘marginal relief calculator’.
Director-shareholders in companies with higher levels of profits are likely to need to plan for the cash flow implications of higher corporation tax bills.
Dividends
The overall picture is less favourable for the future. The Dividend Allowance is set to fall, while dividend tax rates are at a new high, making the extraction of profits by way of dividend payment more expensive.
Dividends falling within the Dividend Allowance are not taxable, and for 2022/23, the Dividend Allowance is £2,000 per year. From 6 April 2023, however, it falls to £1,000, with a further fall to £500 per year from 6 April 2024. The change is likely to impact more than 3.25 million individuals in 2023/24.
The effect of this change is compounded by the increase in dividend tax rates. From April
2022, rates rose by 1.25 percentage points. They are now 8.75% for dividends falling within the basic rate band; 33.75% for those falling in the higher rate band; and 39.35% where falling in the additional rate band. Though the increase was originally part of the measures around the Health and Social Care Levy, the rates are set to continue, despite the fact that the Health and Social Care Levy has been scrapped.
Impact on profit extraction strategy
Traditionally, many director-shareholders have relied on a combination of low salary and a significant level of dividend payments to extract profits. Tax advantage has arisen from the availability of the Dividend Allowance, a low rate of corporation tax, and because dividends do not incur National Insurance contributions (NICs) – a saving both for the employer company and the recipient. These advantages are now being undermined.
Dividends are paid out of retained profits, that is profits on which corporation tax has already been paid. In future, for companies with profits above £50,000, this will mean profits subject
to a higher rate of corporation tax, and thus a reduction in the reservoir available to pay dividends. And as the Dividend Allowance shrinks, there will be a much less significant amount available for extraction free of tax. Although incorporation is about more than just tax advantage, these changes make it prudent to keep under review the question of whether a company is the best structure for your business.
Remuneration: last-chance opportunities
An appraisal of remuneration strategy is always beneficial. The best solution for you will depend on your individual circumstances. Given the increasing burden of income tax for Scottish taxpayers, it may even vary depending on where in the UK you are based. However, in every case, the form (bonus as against dividends)
and timing of remuneration take on unusual significance for director-shareholders this year, with the potential to impact the overall tax position even more than usual.
Planning potential: watch timing
Dividend payment in the 2022/23 tax year gives a last-chance bite at the current higher Dividend Allowance, and the higher additional rate threshold (top rate in Scotland). You may want to consider accelerating payment of dividends if there is scope to do so.
Procedure around declaration and payment of dividends is complex and it is important to check that it is done correctly. In times of economic stress, it is also important to be sure that there are profits available for distribution.
Here to help
Please do not contact us to discuss any of the issues raised here.
For other year end tax planning opportunities including income tax rates and allowances, tax and your family, savings and investments, capital gains tax and Gift Aid, download our ‘Year End Tax Planning Guide’.
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