For private company owners fortunate to have a degree of choice as to how to pay themselves, at higher marginal tax rates in particular, dividends have held a longstanding advantage.
The combined impact of recently announced corporation tax and income tax changes mean that, from 1 April 2023, dividends may no longer be the more tax-efficient option. For an additional rate taxpayer, for example, (ie. those with incomes over £125,140 from 2023/24) the overall effective tax rate on surplus profits extracted is going to be c55% for both dividends and bonuses. At the basic rate of personal tax (income up to £50,270), dividends may continue to hold a tax advantage, whereas at the higher rate of personal tax (income levels between £50,270 and £125,140) a bonus may actually be less costly in tax terms.
There’s much more to profit extraction strategy than just headline tax rates, as well as options beyond bonuses and dividends, but the upcoming tax rate changes represent a significant shift in dynamic. To review the profit extraction strategy for your own business before these changes bite, do not hesitate to contact one of our tax specialists.
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