Dividend combined tax rates are increasing

From April 2023, with corporation tax rates set to increase to 25% for companies with profits over £250,000, the combined tax rate of a higher tax rate taxpayer extracting dividends from company profits increases to a maximum of 50.4%. For additional rate taxpayers this increases further with a rate of up to 54.5%.

Current remuneration strategies are centered around declaring a small salary and excess profits being extracted through dividends as they are taxed personally at a lower tax rate (7.5%/32.5%/38.1%) when compared to a salary (20%/40%/45%). Each individual can also make use of their £2,000 tax free dividend allowance. In the current tax environment this is the most tax efficient strategy but the increased corporation tax rates are set to change all of this!

Salaries declared are a tax deductible expense of the company thus reducing the taxable profits of the company for the year. Although salaries are taxed at a higher rate, there is potential for an overall lower tax bill due to the reduction in the corporation tax liability.

From April 2023, this pre year-end tax planning would be beneficial to director/shareholders whose:

YourThe tax improvement may be marginal, but any scenario that can realise a tax benefit should be explored.

So what are the cons?

The salary must be declared before or at the year-end, there is no option for reviewing this after the year-end has passed.There may also be additional cost for running the additional salary through the payroll, although many companies are already running payroll monthly so this should be minimal. There is also the additional cost of the accountant’s time.

If the benefit is marginal, why bother?

Research & Development!

When a director works on a Research & Development (R&D) project a portion of their salary will become qualifying R&D expenditure. Profit making SME’s can then deduct an extra 130% of the qualifying expenditure from their taxable profits.

For example, a director working 50% of their time on R&D projects declaring an additional £30k salary could reduce their corporation tax liability by up to £15k.

The tax benefits between the two strategies then start to become substantial!

More companies are eligible for Research & Development than they expect. If you would like to discuss Research & Development or the tax implications of the new remuneration strategy for you and your company, please give us a call on 01303 850992.