By: AJ Chambers | 27 June, 2023

Tax rate changes | Tim Humphries, RPG Crouch Chapman

Changes to tax rates have implications for the remuneration strategy of owner-managed businesses.

By Tim Humphries, Tax Partner at RPG Crouch Chapman, on the tax rate changes.


Up until 1 April 2023 it had been fairly standard planning for the director/shareholders of owner-managed companies to take a salary within the tax-free or national insurance-free bands and take any further remuneration by way dividends (reserves permitting).

Such considerations are unlikely to impact larger corporates who will employ directors on significant salaries already. This article looks at recent changes to the tax rates. To determine what mix of salary and dividends are the optimum remuneration strategy for an owner-managed business.


Dividends are an option only if the company has been
profitable and has retained earnings to distribute.


It has been widely publicised that the main corporation tax rate has increased from 1 April 2023. The Small profits CT rate has remained at 19%. But for those companies with taxable profits in excess of £250,000 the rate has increased to 25%. The £250,000 limit is divided by the number of group companies and any other companies under common control plus one. Where the profits fall between £50,000 and £250,000 marginal relief applies. Meaning the effective rate of corporation tax increases gradually from 19% up to 25% for profits between these two thresholds.

With the plethora of tax rate changes, it is worth a reminder of where we have ended up by the start of the 2023/24 tax year. The proposed Health & Social Care Levy has been scrapped. So the previous National Insurance rates have reverted back to where they were at the start of 2022/23, but the dividend rates remain 1.25% higher than they were in 2021/22.

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Table 1: Current National Insurance and dividend rates

National InsuranceFromToApplicable Rate
Primary Threshold012,5700%
Upper Earnings Limit12,57150,27012%
Above Upper Earnings Limit50,271+2%
Secondary Threshold09,1000%
Above Secondary Threshold9,101+13.8%
DIVIDENDS
Dividend allowance£1,0000%
Basic rate£0£37,7008.75%
Higher rate£37,701£125,14033.75%
Additional rate£125,140+39.35%

At various times in the past, the Chancellor of the day has announced that the Primary and Secondary thresholds would be aligned. Only for them to fall out of sync shortly afterwards. We currently have a large disparity between the primary and secondary thresholds for tax rate changes.

Between £9,100 and £12,570 the company will pay National Insurance at 13.8%. But the employee would have no liability to Primary contributions. The company will get a corporation tax saving on the salary + NI at a rate of at least 19%. So overall an owner managed business is better off paying a salary at the primary threshold of £12,570 and suffering a small secondary liability on the earnings between £9,100 and £12,570.

A salary of £12,570 per year, or £1,048 per month would incur a total NI liability for the year of £478.86. Assuming the company was already paying a salary of up to the secondary threshold of £9,100 this additional salary would save a further amount of corporation tax of at least £750.28 (depending on what corporation tax rate the company ends up paying). So overall there is a saving of around £270 by paying this level of salary for tax rate changes.

But what about above this amount. Is it more efficient to pay a dividend or a bonus? Dividends are a distribution of a company’s retained earnings, hence dividends are only an option if the company has been profitable and has retained earnings to distribute.


A few reminders about the payment of salaries

  • A salary/bonus can be claimed as a tax deduction provided it is paid wholly & Exclusively for the purposes of the business.
  • A bonus is eligible for a corporation tax deduction as long as it is paid within nine months of the end of the accounting period in which it is accrued.
  • Generally the date a salary is taxable on the recipient is the date when the salary is paid to the employee or they become entitled to it.
  • For a director there are additional dates that a salary may be considered received:
    • The date the salary is credited to the company’s accounts
    • The date the salary amount is determined. If this is for the current accounting period then the date is taken as the accounting period end date.
  • Salaries are paid for a specific period. If this falls in a period when the employee was not UK resident then it has to be considered if the salary is taxable in the UK at all. Even if the salary is received at a time when they have become UK resident again. The converse is true as well, a non-resident employee will be fully liable to UK taxes if the salary is paid for a time they were resident in the UK even if they have subsequently become non-resident.

EXAMPLE 1 below shows a very basic example of an owner-managed company that has £100,000 in cash available to pay either a salary or a dividend. It is assumed there are sufficient distributable reserves. As can be seen, the tax efficiency of each route depend on whether the company is paying tax at 19% or 25% – for simplicity I have overlooked the marginal rates which may also apply.

It will always be worth utilising the £1,000 dividend allowance, if reserves allow.


The interaction of the income tax and national insurance due plus the corporation tax savings on salaries demonstrate that with a corporation tax rate of 25% it can be more efficient to pay a salary than a dividend when the company is a 25% corporation taxpayer. But when the company is a 19% taxpayer the dividend route comes out more efficient.

The conclusion can only be that the precise facts of each case should be evaluated. There may also be other factors to consider. For example, the impact of available losses in the company or incurred personally could easily impact the situation. It will always be worth utilising the £1,000 dividend allowance if reserves allow. Therefore it would be worth considering a salary of £99,000 and a £1,000 dividend in these circumstances as well.


Of course we should not be driven solely by the tax position of dividends or salaries. There are other factors to consider:

  • Employer Pension contributions are also eligible for a corporation tax deduction. And are not charged to tax on the employee. So are a very efficient way to extract profits from a company, particularly with the proposed increase in the annual allowance to £60,000. Financial Advice should be sought on the impact of making pension contributions.
  • There are tax efficient benefits such as electric cars which could also form part of a director/shareholders’ remuneration package.
  • Taking a salary reduces EBITDA and therefore the company’s ability to borrow could be impacted.
  • Anyone in the midst of an earn-out period which relies on EBITDA could be impacted by taking a bonus over a dividend.
  • The PA Holdings case, amongst others, has shown that HMRC do not like employees swapping salaries for dividends. So if a director/shareholder starts taking an increased regular salary. And in the future it becomes more efficient to withdraw dividends. It may not be acceptable to HMRC to switch back to dividends. They may seek employment taxes on the dividends taken.
  • It is also worth noting that the tax and NI on salaries/bonuses is due immediately via PAYE. Whereas the tax on dividends is payable via self-assessment so there can be a cashflow disadvantage of salaries.

Summary

It is best to review the position in detail with your clients. Taking into account likely profitability of the company and the individuals personal circumstances. Tax advice should never be the sole focus. Whatever strategies are adopted should also be looked at from a commercial angle.


EXAMPLE 1BonusDividend
Cash available 100,000100,000
Employers’ NI13.80%11,023
Gross Bonus88,977
Personal NI liability012,5700%0
12,57050,27012%4,524.00
50,27088,9772%774.14
Taxable income after personal allowance76,40787,430
Personal tax liability037,70020%7,540.00037,7008.75%3211.25*
37,70076,40740%15,482.8037,70087,43033.75%16,783.88
Total of all liabilities39,343.9416,783.88
Corporation tax savings
If CT rate is19%-19,000.00
If CT rate is25%-25,000.00
Total tax costs
If CT rate is19%20,343.9416,783.88
If CT rate is25%14,343.9416,783.88

Many thanks to Tim Humphries. Tim is a Tax Partner at RPG Crouch Chapman. Tim was speaking to Tim Keech, Recruitment Consultant at AJ Chambers about tax rate changes.
If you would like to work with Tim Keech, who recruits for tax professionals in London, please contact him at:
tim.keech@aj-chambers.com

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