Following the Autumn Statement which included corporation tax rate increases in April 2023, should you be rethinking your profit extraction strategy for the year? Head of Payroll Joanne Gibson discusses here.
Dividends – first tax increase
When the NI rates increased in April 2022, the government introduced a matching increase to the tax rates on dividends. This was primarily aimed at director shareholders who take salaries below the threshold at which NI applies (and so weren’t affected by the NI increase) and the greater part of their income from their companies as dividends. That seemed fair. However, when the NI increase was reversed in November the tax rates on dividends were not, and in his Autumn Statement the Chancellor confirmed that they will remain at the higher rate.
Dividends – second tax increase
The Autumn Statement also included a measure to reduce the dividend nil rate band (DNRB). This is the amount of dividends an individual can receive at a 0% tax rate. The DNRB will be reduced from its current level of £2,000 to £1,000 from April 2023, with a further reduction to £500 from April 2024.
CT Tax, Salary and Dividends
From April 2023 the rate of corporation tax (CT) rises from 19% to 25% on company profits in excess of £50,000 per year, known as marginal relief, where profits are between £50,000 and £250,000. This is tax neutral for dividends but saves tax for companies paying salaries, thus coaxing owner managers in that direction.
Despite improving the tax efficiency of salary compared with dividends, the latter remains the more tax-efficient method of taking income from a company.