[25.03.23]

As clients know a company and its shareholders have a number of tax elements:

• Corporation Tax is due on profits.
• Directors can receive a salary which is subject to PAYE and National Insurance like any other employment – this is deducted as an expense in reaching profit on which Corporation Tax is due.
• Shareholders can receive some or all of the profit after Corporation Tax as a dividend, which is taxed as personal income – Dividend Tax is applied at a lower rate to dividend income than other income, reflecting that Corporation Tax has already been paid.

In a typical owner-managed company where the Shareholders are also the Directors, it is normal to take a small salary and dividends for the remainder.  However, with the changes to the Corporation Tax rates this year, we have considered if this is still the most tax efficient option for clients.

Corporation Tax

Corporation Tax is paid on company profits, ie. turnover less expenses.

Corporation Tax rates from April 2023 will change from the previous 19% regardless of the size of the business to:

• Small Profits Rate – profits of up to £50,000 – 19% Corporation Tax
• Main Rate – profits over £50,000 – 25% Corporation Tax
• Marginal Small Companies Relief applies where profits are between £50k and £250k

The Marginal Small Companies Relief is complex and we will advise individual clients who fall within this band.

Income Tax

Income Tax is charged on all income during a tax year, eg:

• Salary
• Dividends (special tax rates as they are from taxed profits)
• Rents
• Self Employments as a Sole Trader/ Partner
• Interest

The tax rates for 2023/24 are:

• £0 to £12,570 – 0%
• £12,570 to £50,270 – 20% – Basic Rate Band
• £50,270 to £125,140 – 40% – Higher Rate Band
• over £125,140 – 45% – Additional Rate Band

The £12,570 0% Personal Allowance tapers out on Incomes over £100,000 at £1 tapered deduction for each £2 of income over £100,000 creating a 60% marginal rate.

Income Tax is aggregated – so all sources of income are added up and the bands above applied.

As dividends have come out of company profit on which tax has already been paid, they are subject to a special rate:

• There is a £1,000 Dividend Allowance (2023/24, reducing to £500 in 2024/25).  The Dividend Allowance is part of the regular Basic Rate and Higher Rate bands, and not separate
• Dividends over £1,000 are taxed as follows:

• • 8.75% If they are in the Basic Rate Band
  • 33.75% if they are in the Higher Rate Band
  • 39.35% if they are in the Additional Rate Band

Salary v Dividend

We have undertaken various modelling to understand whether it is better for owner-managers to still take a higher dividend rather than salary or indeed a bonus, when they fall within the higher rates of Corporation Tax.  The answer is that in most cases it remains tax efficient to continue to take higher dividends.  We will of course advise clients on a case-by-case basis.

If you wish to discuss your personal circumstances, please contact Jackie or Andrew.

Castletons Accountants