In September 2021, the prime minister announced a 1.25% rise in Dividend Tax, which will commence in the 2022/23 tax year.
In the same announcement, the prime minister introduced the new Health and Social Care Levy, which will cause a matching 1.25% rise in National Insurance contributions (NICs) that will be paid by employees, employers and the self-employed from the same tax year.
If you are a company director, this 1.25% increase in both the Dividend Tax and NICs will likely result in a higher tax bill for both you personally, and for your business.
Businesses have already been through trying times with the Covid-19 pandemic and the rising rate of inflation, so you could have concerns about how these tax rises could negatively affect your company. What’s more, Corporation Tax is set to rise for larger businesses in 2023 – yet another way your business could be financially afflicted in the coming years.
Read on to find out how the Dividend Tax and NICs increase may affect you and your company, and the remuneration strategies you could apply in response.
How the rise in Dividend Tax and NICs will affect company directors
As the owner or part-owner of a company, you will need to balance out how your own salary is affected by these tax rises, while taking on enough of the burden to minimise its effect on your business.
Alongside the tax and NICs you will pay on a personal level, as a company owner, your business will also likely pay both Corporation Tax and National Insurance, meaning there will be challenges posed to both your personal and corporate wealth.
The below table compares the basic, higher and additional rates of Dividend Tax between 2021/22 and 2022/23.
On the personal side of things, if you take home more than £2,000 a year in dividends from your company, you will begin paying higher tax on these dividends in the 2022/23 tax year.
For example, if you take £10,000 in dividends a year, £8,000 will have the new Dividend Tax rate applied. In this scenario, your Dividend Tax bill would increase by £100 to £2,700.
While these changes may seem incremental, when combined with the increased NICs and proposed changes to Corporation Tax, both your company’s wealth and your personal wealth could be more significantly affected than you think.
What’s more, now that Dividend Tax is increasing, the Income Tax benefits of taking dividends will be less noticeable.
In previous years, company directors have often drawn a lower salary to minimise their Income Tax bill, while paying their remaining salary in dividends, as well as in other tax-efficient remunerations such as pension contributions.
The effective rate of tax, meaning the estimated percentage of tax you pay overall when salary, dividends and other remunerations are accounted for, will increase as a result of the Dividend Tax hike.
There are alternative remuneration strategies to salary and/or dividends as a company director, which could mitigate these tax increases. Ultimately, though, taking dividends is still likely to be the preferred remuneration strategy, provided that your business is in a position to pay them in the coming years.
As 5 April approaches, now could be the time to explore alternatives to dividend payments, as well as to seek advice from your financial planner when taking these steps.
Both your personal and corporate wealth will be affected by the 1.25% NICs increase in the 2022/23 tax year.
You can use pension contributions to reduce your Dividend Tax and NICs
As you will already know, your pension contributions attract tax relief.
As a business owner or director, assuming your employer pension contributions are “wholly and exclusively for the purposes of the business” you can receive Corporation Tax and National Insurance relief.
In 2021/22, that is a 13.8% National Insurance saving, which you could redirect to your pension pot. This will rise to 15.05% from 2022/23 when employer National Insurance rates rise.
While taking dividends may still be more tax-efficient than drawing a salary, the 1.25% Dividend Tax increase might mean that exchanging some dividend payments for pension contributions could be a better option.
The downside of this, of course, is that by placing a larger proportion of your salary into your pension, you may not be able to access this money for some time. Unlike dividend payments, your money will be inaccessible until the age of 55 (rising to 57 in 2028).
If you need guidance on how to extract money from your business in light of these tax rises, please email or contact us on 020 7400 4700.
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.