#Navigating profit confiscation after the increase in the corporate tax rate

September 6, 2023

This month’s Cornwall Living magazine features our editorial by Becca Blewett entitled “Maximizing Profit Extraction”:

Following the recent increase in corporate tax rates on April 1, we speak to Becca Blewett, Senior Associate at RRL (experts in all areas of accounting, from audits to nonprofits), and she sheds light on some of the ways you can make profits You from your company, from salary (including benefits and bonuses) and dividends to pension contri­bu­tions.

Becca begins by explaining salaries: “Paying a salary is one of the most common ways to make a profit. Any person with a taxable income of less than £100,000 has an annual personal allowance of £12,570. If you received a salary of £12,570 from your company, you would pay no income tax on it. Any salary between £12,570 and £50,270 would be taxable at 20%. A salary between £50,270 and £100,000 would be taxable at 40%. Higher tax rates apply to income over £100,000 as the personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. Your personal allowance is therefore zero if your income is £125,140 or more.

“The other ‘stealth band’ of child benefit for high earners applies if a partner’s income exceeds £50,000. Directors are liable for National Insurance Contri­bu­tions (NICs) for any salary over £12,570. Employer Secondary Class 1 NICs are payable on any salary over £9,100 (for 2023/24). However, there may be an option for Employment Allowance (£5,000 for 2023/24) which will be offset against the first £5,000 of the employer’s NIC due.”

Becca further explains Employment Allowance: “Employment Allowance is available to any business (or group of companies) with more than one employee whose Class 1 employer NIC liability is less than £100,000. This means directors could pay themselves £12,570 a year (or £9,100 if Employment Allowance is not available), which will count towards their entitlement to state benefits, without paying income tax or national insurance contri­bu­tions. Both salary payments and any NICs paid by the employer are tax deductible for companies for corpo­ration tax purposes.” However, unlike salaries, dividends are not subject to the NIC and are still subject to income tax, albeit at lower rates, as Becca explains: “Dividends currently apply a £1,000 allowance (for 2023/24), meaning you don’t have to pay tax on the first £1,000 of dividend income. From 2024/25 this amount is set to be halved to £500. Dividends in excess of this £1,000 allowance are taxed at 8.75% if they fall in the basic rate band, 33.75% if they fall in the higher rate band and 39.35% if they fall in the additional tax rate range. The company must also ensure that it has enough distrib­utable reserves to declare the dividend. Where spouses are share­holders, share­holding can be organized so that both spouses can collect dividend tax efficiently (useful if the amount to be withdrawn exceeds £50,270).”

Finally, Becca kindly intro­duces us to employer pension contri­bu­tions, the most tax efficient way of extracting profits from a company: “Consid­er­ation should be given to whether the directors need to have the money available immedi­ately or whether they can keep it.” Funds remain blocked until you receive your pension. Employer pension contri­bu­tions, like salary, are a deductible expense for corporate tax purposes. As long as the contri­bu­tions do not exceed the individ­ual’s annual allowance, they are not subject to income tax, making them extremely tax efficient. These should be considered whenever you do not need the cash in your hands and the business does not need the funds.”

Becca gives us one final piece of advice: “It should be noted that when the Companies House reforms come into effect, shortened accounts will no longer be available for small and micro businesses. This means that an income statement must be filed (signif­i­cantly increasing the financial infor­mation available to the public) and the value of any dividend distri­b­u­tions would be visible to those viewing the accounts. Many owner-managed limited companies are therefore consid­ering making profits through salary rather than dividends.”

Even if the answer is not always clear and depends on the circum­stances, the friendly team at RRL will be happy to provide you with advice and support. So just give us a call.

This article was published for Cornwall Living magazine, August 29, 2023 (page 100): Cornwall Living 139 by Engine House Media – Issuu