Personal tax planning in 2021/22

The hike in National Insurance – what does it mean for you?

Boris Johnson’s announcement last week of tax hikes to pay for the NHS & Social Care amounts to one of the biggest tax raising measures in the UK for a long time, says Harwood Hutton’s Head of Tax Advisory Cormac Marum.

Precise details at the moment are sparse – no ‘Red Book’ was published and no draft legislation yet presented to Parliament because, officially, it was not a ‘Budget’. What is clear, though, is that the notoriously complex UK tax system is to become even more complicated.

As a result, it becomes more crucial for individuals to take advice on precisely how they themselves will be affected by these changes.

The 1.25 percentage point hike in rates of National Insurance from April 2022 for both employees and employers will from April 2023 morph into a separate NHS & Social Care levy applicable on all earnings (even of those of pensionable age who continue to work). On top of that comes a 1.25 percentage points increase in the tax paid on dividends.

This means we shall all be paying more tax, which is presumably not exactly what the electorate had in mind in December 2019 when a ‘Conservative’ majority in the General Election.  So much has indeed changed over the past two years.

Following every Budget, the question arises whether it is better for clients to take money from their companies by way of salary or dividends. The answer in the past used to be crystal clear – take enough salary to guarantee future entitlement to State benefits and take the rest in the form of dividends.

Over the years, the advantage from such a strategy has been significantly reduced with numerous changes to rates and other technical adjustments, like the abolition of the tax credit on dividends, which only tax professionals really understood.

Back in March in his Budget, Chancellor Rishi Sunak announced that from April 2023 corporation tax was going to increase generally to 25% for companies with profits of £250,000 or more with the rate staying at the current 19% only for those small companies with profits of no more than £50,000.  Standalone companies with profits of between £50,000 and £250,000 would have a marginal corporation tax rate of 26.5%.

Those planned changes altered the landscape on the question of salary or dividends. From April 2023 the advantage of taking dividends was removed for standard and top rate taxpayers and from that date it appeared they would be better off reverting to taking only salaries.

With the latest announcement, it appears that the picture has changed once again.

Now, the general picture, appears to be a swing back to taking dividends over salary (unless you are not a basic rate taxpayer and the company pays corporation tax at a marginal rate of 26.5%).

Why is this? Fundamentally, it is because if salary is taken, the company has to pay 1.25 percentage points more in employer NIC and the individual faces a similar increase in employee NIC.  If a dividend is taken, the individual faces only a single 1.25 percentage points increase on their dividend tax rate.

It appears taking dividends rather than salary will alleviate part of the pain of Boris Johnson’s tax rises but it won’t remove all of it.

Dividend v salary comparison after Boris Johnson’s tax hike

Effective tax rates

Current position

Basic rate Higher rate Top rate
Salary 40.2% 49.0% 53.4%
Dividend 25.1% 45.3% 49.9%

 

From April 2022

Basic rate Higher rate Top rate
Salary 42.0% 50.7% 55.0%
Dividend 26.1% 46.3% 50.9%

 

From April 2023 – where company pays corporation tax at 19%

Basic rate Higher rate Top rate
Salary 42.0% 50.7% 55.0%
Dividend 26.1% 46.3% 50.9%

 

From April 2023 – where company pays corporation tax at 25%

Basic rate Higher rate Top rate
Salary 42.0% 50.7% 55.0%
Dividend 36.1% 50.3% 54.5%

 

From April 2023 – where company pays corporation tax at 26.5%

Basic rate Higher rate Top rate
Salary 42.0% 50.7% 55.0%
Dividend 32.9% 51.3% 55.4%

 

Highlighted above are the lower effective tax rates for an owner-manager.

Action to take

If you would like to explore tax efficient ways of withdrawing funds from your company, please contact your usual Harwood Hutton adviser to discuss your own particular situation.

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