Chartered Accountants
Budget 2021 – Are Changes Required To Remuneration Planning?
With the low rates of Corporation Tax which we have enjoyed in recent years, it has been possible for a director/shareholder to extract their remuneration by way of a small salary and the balance in dividends, which often gave a significant overall tax saving.
With the future changes to Corporation Tax rates announced in the Budget, with effect from 1 April 2023, is this planning still worthwhile?
In short, yes, although the benefits will reduce significantly from 1 April 2023, particularly if your company profits are between £50,000 and £250,000, where the highest Corporation Tax rate of 26.5% will apply to profits in this band.
There can be, however, a considerable saving to be made by structuring your remuneration in this way. This could either be utilised to give you more cash, after tax for the same cost to the company, or for companies who may be struggling with cashflow due to the difficult trading conditions of the last year, you could maintain your existing take home income, while leaving more funds in the company.
The savings can be achieved in a number of ways:
- Paying a low salary gives a saving in Employer’s and Employee’s National Insurance as this is not charged on dividends
- Personal tax rates on dividends are lower than tax rates on salary
- Dividends are not taxed at the higher Scottish Income Tax rates, unlike salary
- PAYE/NIC is paid monthly, whereas tax on dividends will be payable on 31 July and 31 January in any one tax year, providing a valuable cash flow saving
As this may not be the best option for all businesses and individuals, our EQ Taxperts would be happy to discuss your personal circumstances and review your remuneration planning to advise on the best approach for you. You may wish to reassess at 1 April 2023 but for now, the rules remain the same. When considering remuneration planning, other taxes and commercial factors may be relevant, hence taking advice is critical.
Get in touch by calling one of our offices or email [email protected].
