April 2023 marked a significant turning point for tax rates in the United Kingdom, particularly concerning dividends and corporation tax for owner-managed companies. In this article, we will delve into the key alterations to tax rates that have taken effect from April 2023 and explore their implications for director shareholders in the UK.
Dividend allowances and tax rates
One of the changes introduced in April 2023 is the reduction of the dividend allowance from £2,000 to £1,000. This allowance will be reduced further from April 2024, when it goes down to £500.
So from April 2023, the first £1,000 of dividend income is exempt from tax. Beyond this threshold, dividends will be taxed at different rates based on an individual's income tax band. Basic rate taxpayers will be subject to an 8.75% dividend tax rate, while higher rate and additional rate taxpayers will face rates of 33.75% and 39.35%, respectively.
Director shareholders must review their remuneration strategy to identify whether a low salary and high dividends policy will still be the most tax efficient way of extracting money from their business.
However, the change in dividends is only one aspect that company owners must consider.
Corporation tax rates
In addition to the dividend tax adjustments, the UK has witnessed changes in corporation tax rates from April 2023.
The corporation tax rate, which was 19%, has now increased to 25% for profits exceeding £250,000. However, small companies with profits under £50,000 can still benefit from the reduced rate of 19%. There will also be a tapering system for companies with profits between £50,000 and £250,000, ensuring a gradual increase in tax liability.
Income tax rates
The personal tax allowance of £12,570 has been frozen for the 2023/24 tax year. The basic and higher rate tax bands are also frozen at £12,571 to £50,270 (paying 20% tax) and £50,271 to £125,140 (paying 40% tax), respectively. However, the rate of the additional rate tax band has been reduced from £150,000 to £125,140 (paying 45% tax) from April 2023.
The tax changes to dividends, corporation tax, and income tax could significantly impact how director shareholders extract salaries and profits from their businesses.
Basic rate taxpayers
Each person's situation has to be reviewed on a case-by-case basis. However, for the current tax year, director shareholders who are basic tax rate payers are still better off taking a lower salary alongside dividends.
Higher and additional rate taxpayers
If the company is paying the higher rate of corporation tax from April 2023, higher and additional rate taxpayers may be best taking bonuses rather than dividends from the company, as this would help reduce profits from the company and, therefore, the amount of corporation tax paid. A bonus rather than a dividend policy may also benefit companies paying corporation tax at the new marginal rate or who are eligible for R & D credits (Research and Development).
Conclusion
These tax rate changes have positive and negative implications for director shareholders and their companies. It is crucial for director shareholders to carefully evaluate their financial strategies and understand the potential impact of these changes on their tax liability.
At DWilkinson&Company we know that every person's situation is different, and there is no such thing as a 'one size fits all' approach to tax planning. If you would like us to look at the options available, don't hesitate to contact 0113 320 0001 or email office@dwco.co.uk.