Changes announced in the Autumn Statement will be keenly felt by many company directors, especially those who have traditionally relied on a strategy of low salary and higher dividend payment for profit extraction.
A higher tax rate bracket
Company directors have traditionally used a strategy of low salary and higher dividend payment to extract profit.
The freezing of the Income Tax personal allowance is one major factor affecting company director remuneration. The basic allowance is now set at £12,570 until 5 April 2028. The UK higher rate threshold is also frozen at £37,700 for the same period. From 6 April 2023, the Income Tax additional rate threshold falls from £150,000 to £125,140. These are measures which will push many directors into higher rates of tax.
The position is different in Scotland, where the higher and top rates increase to 42% and 47% from 6 April 2023; the starter, basic, intermediate and higher (£31,093) rate thresholds are frozen, and the top rate threshold falls to £125,140.
A shrinking Dividend Allowance
Of particular importance in a company remuneration context, the Dividend Allowance is being significantly reduced. From 6 April 2023, it falls to £1,000, from the current £2,000. From 6 April 2024, the axe falls again, with a drop to £500. All these developments fundamentally reshape the outlook for tax and are likely to require a review of remuneration strategy.
This change compounds the impact of other recent tax measures, notably the increase in the tax rate on dividends. Originally part of the Health and Social Care Levy (HSCL) package, the higher tax rate remains, though the HSCL has been dropped. This means that the increased dividend rates (8.75% basic rate; 33.75% higher rate; and 39.35% additional rate) continue to apply after 5 April 2023. The rates apply across the UK, including Welsh and Scottish taxpayers.
The increase in Corporation Tax to 25% from 1 April 2023 may need to be factored into calculations – though this is not something that will necessarily mean change for smaller companies. Companies with profits of £50,000 or less will pay the small profits rate of 19%. Those with profits between £50,000 and £250,000 will pay at the main rate of 25%, reduced by a marginal relief. Where there are associated companies, however, these thresholds may be reached sooner.
Company remuneration planning advice
In this period of change, we strongly recommend seeking advice on remuneration planning. Strategies include last-chance use of rates and allowances before 5 April 2023, and assessment of the relative merits of dividend and bonus payments. There may also be the possibility of what is called ‘leapfrogging’ – varying profit extraction year on year in order to access lower tax bands.
Your RfM advisor would be happy to help you review your options. Please contact your advisor or enquire at one of our offices.
