You may have seen various articles relating to profit extraction over the past couple of months and it’s worth mentioning again, as things have changed! For a few years now, it’s generally been more tax efficient for shareholders to withdraw profits from a company by way of dividend as opposed to salary.
With changes to corporation tax rates from 1 March 2023 as well as the reduced tax-free dividend allowance, the additional 1.25% tax rate on dividends and the lowering of the additional rate starting band, there are now several factors that affect the calculations. So, we’re back to saying “it depends”!
Tax-free dividend allowance
The tax-free dividend allowance has been reduced to £1,000 from 6 April 2023 and will reduce further to £500 from 6 April 2024. With the additional 1.25% on top of the usual dividend rates introduced last year, this means that more dividends will be subject to tax at a top rate of 39.35%.
For the current tax year, the level of income you start paying additional rate tax on has reduced to £125,140 (down from £150,000), which is also the level of income where the personal allowance is fully withdrawn. For income between £100,000 and £125,140, that means an effective rate of tax of 60% (for every £2 of income over £100,000, £1 of personal allowance is withdrawn).
Corporation tax
For companies, where the profits are over £250,000, the corporation tax rate is now 25%. Only companies with profits below £50,000 pay tax solely at 19%. Those companies with profits in between pay on a sliding scale between 19% and 25%.
Notwithstanding the other factors to consider regarding dividend or salary, all the above means that you’ll have to do some number crunching if you want the most tax-efficient option.
Another alternative is, of course, to consider pension contributions instead of dividend or salary, particularly with the increased allowance of £60,000. However, you must take tax advice from a qualified pensions adviser on this, as there are many more points to consider before you choose this option.
If you have any questions or would like any advice, please get in touch with our Private Client team, who will be happy to help.
