Owners and directors of businesses have become used to receiving their remuneration in set ways, typically either by salary/bonuses or dividends and often a mix of the two. The use of Directors Loan Accounts (DLA) is also fairly common with owner managed businesses and can be a helpful way of tracking personal expenditure through the company.
However, recent announcements may give cause for these individuals to consider their remuneration package and whether this is still appropriate.
Dividend tax rate increase
As announced by the Chancellor in September, the income tax rate in respect of dividends is increasing by 1.25% from 6 April 2022 to help fund health and social care.
The dividend trust rate of income tax is also increasing in line with the additional rate, increasing from 38.1% to 39.35%.
Before 6 April 2022
Post 5 April 2022
Ordinary rate
7.5%
8.75%
Higher rate
32.5%
33.75%
Additional rate
38.1%
39.35%
The increase in the dividend tax rate will impact individuals who receive dividends in excess of the dividend allowance, allowing individuals to receive dividends up to £2,000 free of tax and have total income more than their personal allowance (frozen at a maximum of £12,750 until 2025/2026).
On the basis that all other facts remain the same individuals will be paying an additional 1.25% on dividends from 6 April 2022 onwards.
Corporation tax rate increase
This will be compounded by the fact that the corporation tax rate is increasing from 19% to 25% on 1 April 2023, meaning that additional tax will be due on profits, reducing the amount of distributable reserves and cash available to pay out as dividends.
Amounts before April 2023 (£)*
Amounts post April 2023 (£)*
Profit before tax
100,000
100,000
Corporation tax (19%/25%)
(19,000)
(25,000)
Profits available for distribution
81,000
75,000
Income tax on dividend (32.5%/33.75%)
(26,325)
(25,313)
Total tax paid
(45,325)
(50,313)
Net amount received
54,675
49,688
Total effective tax rate
45.33%
50.31%
*Please note that this is an illustration and is based on assumed facts, such as the individual will be an higher rate taxpayer and will have fully utilised any dividends and personal allowance.
As illustrated above, taking a profit before tax of £100,000, there will be an additional £6,000 of Corporation Tax arising post-April 2023, along with the increase in dividend tax rate by 1.25%, albeit on a smaller amount of profits available, it will result in an increased total effective tax rate of c.5%.
National Insurance Contribution rate increase
As part of the Health and Social Care Levy, an additional 1.25% has also been proposed for the National Insurance Contribution (NIC) rates for employees, employers and self-employed individuals from April 2022.
Therefore, both employee and employers NIC will increase on wages, salaries and bonuses etc. paid by companies, including the amounts paid to the director shareholders, increasing the costs for all companies.
A small silver lining for companies is that the increased NIC, both for employees and employers, should be deductible for Corporation Tax purposes, especially beneficial given the upcoming increase in Corporation Tax rate.
Directors Loan Account – s455 tax charge increase
The increase of 1.25% will also apply to the rate applied on overdrawn DLAs, increasing this from 32.5% to 33.75%. This will impact close companies where the loan to participator remains outstanding nine months after the period end. This will be refunded to the company where the loan is repaid (either with cash or via dividend).
Even where the s455 tax charge is due to be repaid, it does not happen instantly and as such there can be a strain on cash flow if the amounts are significant, which is more relevant with the increased rate.
Summary
The increases to the rates outlined above will mean the total tax cost of receiving a dividend also increases. Added to this are rising employment costs for staff and directors, due to increased NIC, though this will be deductible against taxable profits for Corporation Tax purposes.
Meanwhile, the increased tax charge on DLAs will mean drawing down debts or having the company pay for things on your behalf may become more costly.
Overall, there are various changes to the tax regime on how an owner and director may receive remuneration and this will likely attract greater scrutiny from HMRC given the recent increases.
Now may be the time to reflect on whether the current package you receive is the most practical for you and the company now and going forward.
Please contact us if you have any questions or concerns in respect of the increased rates being introduced or if you require tax support generally, given the ever-changing landscape.
