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Company Profit Extraction Forecast (2022 – 2024)

Internal Audit

Author: Shona Humphreys (CTA), Chartered Tax Advisor

Shona Humprheys

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 2023/24Dividend 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 managerSalary 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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References:

https://www.gov.uk/guidance/corporate-tax

Tips & Advice® Tax, Year 22, Issue 2 (21 October 2021)

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