The standard rate of corporation tax has risen from 19% to 25%, while the dividend allowance of £2,000 has been halved, and is set to be halved again for the 2024 /25 tax year. Dividend tax rates also remain high. What can company directors do to reduce tax and optimise their finances under these circumstances?
Increase to the standard corporation tax rate
The corporation tax rate has increased from 19% to 25% as of 1 April 2023 for limited companies with profits exceeding £250,000. Companies with profits between £50,000 and £250,000 can benefit from tapered relief (see table below). Company directors with high profit levels may wish to consider strategies to extract profits from the company in a tax-efficient manner.
Taking a salary
It is very common for company directors to take a salary that is equal to, or less than, the personal allowance limit (this is currently £12,570), but above the ‘lower earnings limit’ (which is £6,396 for the 2023/24 tax year). This allows directors to build up qualifying years for their State Pension, without actually paying any National Insurance contributions. Salaries also count as an ‘allowable expense’, so a company director can pay themselves a salary to reduce their corporation tax bill.
Dividend tax rates are currently high
Dividend tax rates remain high. A planned 1.25% reduction to 2023/24 dividend rates was cancelled in October 2022, with rates currently 8.75% for basic rate taxpayers, and 33.75% and 39.35% for higher rate and additional rate taxpayers respectively. The tax-free dividend allowance, which was formerly £2,000, has been cut to £1,000 for 2023/24, and is set to be reduced to £500 from 2024/25 (see table below).
Dividends are paid out of retained profits, on which corporation tax has already been paid. This could mean there are less dividends to distribute once a tax charge of 25% has been applied. A thorough review of various income strategies and streams may be able to help company directors substantially reduce their tax bill.
Pension contributions can help reduce tax
For a company director, paying into a pension via employer contributions can be a tax-efficient way of extracting profits from their business, while saving more towards retirement. Pension contributions are an allowable business expense, resulting in corporation tax savings. Another significant benefit is that employers can also save on the 13.8% National Insurance tax charge by contributing directly into a pension, rather than paying it on a salary.
Making a large payment with carry forward
You can now contribute up to £60,000 to your pension per year, unless you are a higher earner and subject to a tapered annual allowance. The maximum contribution with tax relief can be up to £180,000 in a single tax year, if you have unused allowances from the prior three tax years and were a member of a pension plan. You must use up your annual allowance from the current tax year before carrying forward. Unlike personal contributions, employer contributions via the company are not restricted by relevant UK earnings.
With the right financial planning, business owners can reduce tax bills and boost retirement outcomes. To find out more please call 03300 564 446, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
