Mind Your Allowances
New reduced tax thresholds may impact you
Reductions to some tax allowances and the freezing of others will hit many individuals and businesses hard. The tax changes for 2023/24 also require a rethink of the strategy for small company owners of drawing income as dividends rather than salary.
Until fairly recently, it was usually beneficial for tax for shareholder directors to take dividends instead of bonuses, because dividends are taxed at lower rates than earnings. In particular there are no employer’s or employee’s national insurance contributions (NICs) on dividends. However dividends are paid after corporation tax (CT).
From 1 April 2023:
For income tax, from 6 April 2023:
For higher rate and additional rate taxpayers, these changes largely remove the tax benefit of paying dividends out of company profits above £50,000. If you are in the position of being able to choose whether to draw salary or dividends, you should take advice on the tax effect of each of these options for your and your company’s tax position.
Even at £1,000, the tax-free dividend allowance should not be overlooked. But remember to take into account dividends received from other investments, because these might have used all or part of the allowance. UK dividends rose by 8% during 2022, though the rate of increase is predicted to be less in 2023. Your company can also pay dividends to a spouse and other family members if they are shareholders themselves.
The personal allowance has stayed at £12,570 since 2021/22 and will remain the same until 2027/28. The higher rate threshold will continue at £50,270 as will the NICs upper earnings limit. The freezing of allowances, especially in a time of high inflation, means that tax will eat up an increasing proportion of individuals’ income.
The biggest cut has been to the capital gains tax (CGT) annual exempt amount (AEA), which for individuals is now £6,000, down from £12,300 in 2022/23, and will fall to £3,000 from April 2024.
The reductions in the AEA and dividend tax-free allowance increase the attraction of investing in pensions and ISAs, because income and gains within these wrappers are exempt from tax. The ISA subscription limit for 2023/24 remains at £20,000, but key pensions annual allowances have increased. Remember you need salary or self-employment income to support pension contributions.
Please get in touch if you would like to discuss your options.