If you own a personal or family company, you're probably aware with the benefits of taking dividends as a tax-efficient way to extract profits. However, recent tax changes have affected the benefits of this strategy, and it's important to stay informed and plan earlier for the upcoming tax year.
One significant change is the impact of corporation tax changes, effective from 1 April 2023. If your profits exceed £50,000, you'll face a higher rate of corporation tax, which will reduce the post-tax profits available for dividends. This means that even if your profits remain unchanged, you may not be able to maintain previous dividend payments if your effective rate of corporation tax increases.
Another change to be aware of is the decrease in the dividend allowance. Earlier set at £2,000 for 2022/23, it will be halved to £1,000 for 2023/24, and further reduced to £500 for 2024/25.
The dividend allowance works as a zero-rate band, meaning that dividends covered by the allowance are taxed at a zero rate. However, the allowance also utilises some of the tax bar in which the dividends fall, lowering the profits that can be extracted tax-free. This reduction in the dividend allowance may require a review of strategies such as the alphabet share structure commonly used in family companies to maximize the use of the dividend allowance for family members.
While dividends are still attractive due to their lower tax rates compared to income tax rates, it's important to remember that corporation tax has already been paid on the profits distributed as dividends. Additionally, the dividend tax rates were increased by 1.25 percentage points from 6 April 2022 in anticipation of the now-cancelled Health and Social Care Levy. Despite the Levy not going ahead, the increased dividend tax rates will remain in place for 2023/24. This means that dividends will be taxed at 8.75% in the basic rate band, 33.75% in the higher rate band, and 39.35% in the additional rate band.
Speaking of the additional rate band, the threshold has also changed, with taxable income needing to exceed £125,140 for 2023/24, down from £150,000 previously, for the dividend additional rate to apply.
In summary, these tax changes mean that you may have less profits available for dividends, with only £1,000 being tax-free.
Dividends above this level will continue to be taxed at the higher rates introduced in April 2022, and the additional rate will now apply at a lower threshold of £125,140. It's crucial to stay informed and review your dividend extraction strategy in light of these changes to ensure you're making the most tax-efficient decisions for your personal or family company in the upcoming tax year. Stay ahead of the game and dive into dividends with a clear understanding of the current tax landscape.
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