Company Profit Extraction Forecast (2022 – 2024)
Author: Shona Humphreys (CTA), Chartered Tax Advisor
From April 2023 the Corporation Tax rate is set to increase from 19% to 25%, with a system of tapered relief linking the rate of tax to the profit made in an accounting period.
Profits of £50,000 or less will continue to be taxed at 19%, while those £250,000 or more will be taxed at the full rate of 25%.
This increase will have an impact on smaller companies and their owner managers, particularly those who draw a small salary and top up their income with a larger dividend. Dividends do not attract Corporation Tax relief, meaning a larger profit will be left in the company to be taxed at a higher rate.
From April 2022, the Health and Social Care (H&SC) Levy will increase the dividend rate by 1.25%.
The tables below illustrate the reduced returns to a company following the Corporation Tax rate increase, assuming the owner manager is already a higher-rate taxpayer, in 2023/24 compared to the current 2021/22 tax year.
|Company||Salary 2021/22||Dividend 2021/22||Salary 2023/24||Dividend 2023/24|
|Paid to owner||£ 50,000.00||£46,090.00||£ 50,000.00||£ 43,144.00|
|Employers’ NI||£ 6,900.00||£ 6,900.00|
|H&SC Levy 1.25%||£ 625.00|
|Less: CT relief at 19%/25%||(£10,810.00)||(£14,381.00)|
|Net cost to company||£ 46,090.00||£46,090.00||£ 43,144.00||£ 43,144.00|
|Owner manager||Salary 2021/22||Dividend 2021/22||Salary 2023/24||Dividend 2023/24|
|Paid to owner manager||£ 50,000.00||£ 46,090.00||£ 50,000.00||£ 43,144.00|
|Less: tax on salary at 40%||(£20,000.00)||(£20,000.00)|
|Tax on dividend at 32.5%/33.75%||(£14,979.00)||(£14,561.00)|
|Less: Employees’ NI at 2%||(£1,000.00)||(£1,000.00)|
|H&SC Levy 1.25%||(£625.00)|
|Net amount paid to owner manager||£ 29,000.00||£ 31,111.00||£ 28,375.00||£ 28,583.00|
|Difference||£ 2,111.00||£ 208.00|
The second table illustrates that the tax advantage of dividends over salary falls by more than £1,900 in 2023/24.
Running a business through a company structure has other advantages, and while the tables don’t demonstrate how the owner manager might be better off for tax National Insurance purposes not running a business through a company, it’s clear that the tax advantages of this structure will likely be diminished.
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Tips & Advice® Tax, Year 22, Issue 2 (21 October 2021)