Kids really know how to have fun these days.
My daughter, Anna, had a “Budget Watch Party” with her A-Level Economics mates yesterday. They were even asked to come dressed as their favourite Chancellor – she went dressed as future Chancellor, Anna Davies.
But, for those of us who have to look at this stuff for a living, what were the key points?
Well, I’ve attached a handy summary document but, in this email, I’m going to focus on the bit that I’ve been asked most about in the past 24 hours – the increased dividend tax – as this is the biggest impact on many business owners.
For years, the classic tax-efficient way of taking cash from the business was a small Director salary to mop up the tax-free allowance and then dividends for the rest.
But this has slowly been eroded as the tax-free dividend allowance has been cut from £5,000 to £500 over the past few years, and dividend tax rates have increased.
Add to that, Corporation Tax rates increased a couple of years ago.
So, in the past few years, more and more of our clients have moved to a full salary as the tax difference shrunk. And it also took out the hassle of Director Loans and paying personal tax every 6 months.
Yesterday, those dividend tax rates increased again – by 2 percentage points.
So, what does that mean for you?
Very simply, looking at an extra £100 of company profit (ignoring allowances and assuming the new dividend rates are in place):
- If your company pays 19% corporation tax (profits under £50,000):
- as a basic rate taxpayer
- dividend – total tax about 28%, you keep roughly £72
- bonus – total tax about 37%, you keep roughly £63
- as a higher rate taxpayer
- dividend – total tax about 48%, you keep roughly £52
- bonus – total tax about 50%, you keep roughly £50
- as an additional rate taxpayer
- dividend – total tax about 53%, you keep roughly £47
- bonus – total tax about 54%, you keep roughly £46
- as a basic rate taxpayer
So at the 19% small profits rate, dividends are still usually more tax efficient overall, once you include income tax, employee and employer National Insurance and corporation tax.
- If your company pays the full 25% corporation tax (profits over £250,000):
- as a basic rate taxpayer
- dividend – total tax about 33%, you keep roughly £67
- bonus – total tax about 37%, you keep roughly £63
- as a higher rate taxpayer
- dividend – total tax about 52%, you keep roughly £48
- bonus – total tax about 50%, you keep roughly £50
- as an additional rate taxpayer
- dividend – total tax about 56%, you keep roughly £44
- bonus – total tax about 54%, you keep roughly £46
- as a basic rate taxpayer
So once your company is firmly in the 25% corporation tax band, dividends are still better for basic rate taxpayers, but for many higher and additional rate owners an extra bonus can now be slightly more tax efficient than an extra dividend, because the corporation tax saving on the bonus offsets the extra National Insurance.
Of course, the exact answer for you depends on your personal income, how many shareholders there are and where your profits sit between £50,000 and £250,000, but the direction of travel is clear – the government is steadily squeezing dividends, savings and rental income, and it is no longer safe to assume “dividends are always better than salaries or bonuses”.
If you would like us to run through what this means for your own business and take home pay, just let me know and we can go through the numbers together.
And, don’t forget to take a look at our full summary, which includes for business owners:
- Good news – permanently lower rates for retail, hospitality and leisure properties
- Bad news – more increases to minimum wage
- Bad news – mileage charge on electric and hybrid vehicles
- Bad news – interest and rental income taxes up 2%
Including the dividend tax rates, it looks like Bad News wins 4-1…not a happy score for me after last night.
If you have any questions, please email su*****@*********************co.uk or give us a ring on 0151 380 8099.
Many thanks
Jon