Jennifer Adams offers some tax planning points following the Chancellor’s Autumn Statement 2022.
For some time, the government has been looking to level up the playing field between employees taxed under PAYE and company business owners paid via a combination of salary, bonuses and dividends.
A ‘double whammy’!
Following the (current!) Chancellor's Autumn Statement, it seems that this aim may have become a reality for some directors. The calculations show that the combined impact of the rate changes means that the effective tax rates for dividends versus bonuses are expected to become broadly the same across each of the income tax bands. From 6 April 2023, the additional rate of income tax will apply to income above £125,140 (i.e., the 45% additional tax rate for most income and 39.35% for dividend income) rather than starting at £150,000.
Importantly, the reduction also brings the additional rate band in line with the point at which taxpayers lose their personal allowance, such that the overall effective tax rate for an additional-rate taxpayer becomes 55%, whether the profit is extracted as a dividend or as a bonus. Directors who pay themselves a small salary and take dividends for the balance of pay will also be hit by the reduction in the dividend tax allowance (DTA) over the next two years. The allowance will be halved from £2,000 to £1,000 from 6 April 2023 and again to £500 from 6 April 2024.
However, the changes may also bring a 'one-off' opportunity for tax planning to consider bringing forward bonus payments or paying dividends pre-6 April 2023 to take advantage of the changes.
Plan ahead
As ever with tax, each taxpayer's situation is different and calculations need to be undertaken. However, the following should be considered before the end of the current tax year:
- Ensure that the full dividend allowance is made available for all shareholders who can claim.
- Consider accelerating the amount of salary or dividend payable to 2022/23 rather than 2023/24 (assuming sufficient distributable profits allow payment to be made). Any tax due will be accelerated as well but this might be worthwhile to save tax.
- Be aware of the impact on the higher income child benefit charge and student loans repayment level should dividends be brought back to 2022/23 from 2023/24.
- Consider creating ‘alphabet shares’ if there is more than one director or shareholder. Such shares allow flexibility in the payment of dividends, enabling payment to a particular class of shareholder without having to pay the same dividend rate to each. This is of particular benefit should one or more shareholder be taxed at higher rates and the others are either basic rate taxpayers or do not pay tax or can benefit from the DTA.
- One way to potentially reduce any income tax bill for a director is to save into a pension. If the salary or bonus means that the taxpayer crosses into a higher tax band, making pension contributions could mean the adjusted net income falls below the threshold, potentially avoiding the higher rates of tax. Pension contributions can also be used to reduce dividend tax liabilities by taking advantage of the tax relief on the contribution. As the amount of pension contribution increases the basic rate tax band, larger gains might be realised before the higher rate of dividend tax is payable. Be aware of the lifetime contribution limit of £1,073,100.
Practical tip
Historically, the combination of taking a low salary and dividends has been a more tax-efficient remuneration option than taking just salary or bonuses, particularly for those taxpayers with income in the higher and additional-rate bands. However, now may be the time to take an overall look at the remuneration strategy for directors looking at additional tax-efficient means of withdrawing, such as paying salaries to a family member, charging the company rent should the business premises be owned by a director, and even ensuring that all 'trivial expenses' are claimed.
