How will the corporation tax rise affect your income?
CT increase
The increase in corporation tax (CT) from 19% to 25% in April 2023 won’t only hit big corporations. It will have a profound effect on some smaller companies and their owner managers, especially those who take a small salary but most of their income as dividends. This is because, unlike salary, the payment of dividends is not a tax-deductible cost for the company so a low-salary-plus-dividends policy will leave greater profit to be subjected to the new higher CT rate. This will reduce the profits left that can be paid out to the owner managers. Trap. From April 2022 the various rates of tax on dividends will increase by 1.25%, e.g. the 32.5% rate will become 33.75%.
What will it cost?
While the amount of extra tax resulting from the tax hikes will depend on the amount of profits your company makes and the dividends you receive from it, the overall picture is clear: there will be less tax advantage to running a business through a company. The following tables illustrate the diminishing returns to a company as a result of the CT increase and the effect on the owner-manager’s income (assuming they are already a higher rate taxpayer) for 2023/24 compared to the current tax year.
Company’s position |
2021/22 |
2023/24 |
||
Salary |
Dividend |
Salary |
Dividend |
|
Paid to owner |
£50,000 |
46,088 |
50,000 |
43,144 |
Employers’ NI |
£6,900 |
£6,900 |
||
Health and social care levy |
- |
£625 |
||
Less: CT relief at 19%/25% |
£10,810 |
£14,381 |
||
Net cost to company |
£46,088 |
£46,088 |
£43,144 |
£43,144 |
Owner-manager’s position |
2021/22 |
2023/24 |
||
Salary |
Dividend |
Salary |
Dividend |
|
Paid to owner manager |
£50,000 |
£46,089 |
£50,000 |
£43,144 |
Less: tax on salary at 40% |
(£20,000) |
(£20,000) |
||
Tax on dividend at 32.5%/33.75% |
(£15,555) |
(£14,561) |
||
Less employees’ NI at 2% |
(£1,000) |
(£1,000) |
||
Health and social care levy 1.25% |
(£625) |
|||
Net amount for owner manager |
£29,000 |
£30,534 |
£28,375 |
£28,583 |
Difference |
1,534 |
208 |
||
The tax advantage of dividends over salary (shown as the “difference” in the second table) falls by over £1,300.
A fundamental change
What we can’t show in the tables is that the owner manager might be better off for tax and NI purposes if they didn’t run their business through a company. If they owned the whole company they could become a sole trader, or if they shared ownership with others they could form a partnership instead.
Trap. The tax and NI savings achieved by running your business through a company might well be diminished or lost entirely from April 2023.
Tip. Use the next 18 months to consider moving to an unincorporated business. This can be tricky and have tax costs of its own. We’ll look as this in more detail in a separate article.
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