As Directors and Shareholders you’re in an enviable position; the ability to shape and influence the way that you receive money into your personal life can have significant impact on your pocket. Checking that your personal affairs, your family and business affairs, and your plans for the long term are arranged as tax efficiently as possible is always important: and the period before the end of the tax year, on 5 April 2023, is the best time to do so.
This year, such a review may be even more beneficial than usual. Major change to tax bands and allowances has been announced over the course of 2022. This means some last-chance opportunities to make use of allowances at current rates and to access current tax bands. Similarly, there may be areas where you have discretion over the timing of income and it is worth establishing whether income is better taken this year or next. Here again, a review before 5 April 2023 could have a significant effect on your tax position. For Scottish taxpayers, for whom higher and top tax rates are set to increase as well, there is even more to think about.
As your accountants, we have the all-round vision of your circumstances that can really help make an impact. To make the tax rules work to your advantage, it’s best to start the discussion as soon as possible before 5 April 2023. We look forward to being of assistance.
Here, we use the rates and allowances for 2022/23. Please note that throughout this publication, the term spouse includes a registered civil partner.
Planning potential for Director – Shareholders
The outlook changes significantly with recent and forthcoming changes:
1. 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.
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.
3. Impact on getting profits out of the company tax efficiently
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.
4. Remuneration: last chance opportunities
An appraisal of remuneration strategy is always beneficial. The best solution for you will depend on your individual circumstances so if it’s been a while since you’ve considered how much money you are taking and by what means, get in touch. Also bear in mind important key dates, like mortgage renewals and change in family circumstances.
5. Timing is paramount
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.
Our team of experts can help you determine the best course of action and ensure that you make the most of any tax-saving opportunities. Please do contact your dedicated client manager or email firstname.lastname@example.org if you’d like to know more.