While personal and dividend tax rates are set to remain, Corporation tax rates are set to change from 6th April 2023.

The Corporation tax rate will increase to 25% for companies with profits over £250k.

This  Corporation tax rate increase is on a sliding scale. The existing 19% rate will continue to apply to companies whose profits do not exceed £50k. However, the rate gradually increases with profits between £50k and £250k. The full 25% is reached at £250k.

This gives an effective marginal rate of tax for profits between £50k and £250k of 26.5%. A rate higher than the full rate of 25%.

This discrepancy puts more pressure on the salary / dividend extraction question, and we need to look at the pros and cons of both as well as taking into consideration the company position and your personal tax code.

Salaries

Pros

·      No distributable reserve restrictions.

·      A tax-deductible expense hence reducing profits and corporation taxes.

Cons

·      National Insurance costs for the employee and employer

·      Personal income tax rates higher than dividend rates.

Dividends

Pros

·      No National Insurance considerations

·      dividend tax rates lower than income tax rates

Cons

·      Restricted to company available distributable reserve.

·      Not a company tax deductible expense

Logically one would want to aim to be as tax efficient as possible but the answer is not easy, as no business owner wants reduced profits.

However, if funds will definitely be extracted by the owner, the salary / dividend consideration is an obvious one. A shift towards higher tax-deductible salaries will reduce corporation taxes BUT there are the extra NIC and personal taxes to consider.

The answer is that each case is unique and the whole picture needs to be considered. The impact of NIC, lower personal dividend tax rates and the company actual profits before a salary / dividend decision needs to be considered carefully.

It is recommended that you seek the assistance of a good accountant tax advisor.

Onshore Consulting would be happy to assist you.