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Extracting profit from a company is a vital aspect of financial planning for business owners. With the 2022/23 tax year bringing several changes to National Insurance (NI) rates, dividend taxes, and employment allowance, companies must understand these adjustments and adapt their profit extraction strategies accordingly. This article will provide an overview of the key changes and their implications for businesses.
Understanding the 2022/23 Profit Extraction Changes
National Insurance Rates: Initially, the UK government increased the NI rates for primary and secondary Class 1 and Class 4 by 1.25% for the 2022/23 tax year to fund the Health and Social Care Levy. This change affected other earnings-related NI classes, such as Class 1A and 1B. However, the increase was temporary, and the government reversed it on 6 November 2022.
Dividend Tax Rates: To prevent company owners from replacing salary or bonus payments with dividends, the government increased the tax rates applicable to dividends by 1.25% for 2022/23. The Autumn Statement confirmed that the dividend tax rates would remain in effect despite the Health and Social Care Levy being abandoned.
Employment Allowance: The employment allowance (EA) increased from £4,000 to £5,000 starting 6 April 2022, with certain restrictions on eligibility. This change affects companies with multiple employees, as the EA can be used to offset the first £5,000 of employers’ NI.
Adapting Profit Extraction Strategies
Reviewing Salary and Dividend Mix: In light of the 2022/23 changes, business owners should reassess their salary and dividend mix. With the increased dividend tax rates, it may be more tax-efficient to prioritize salary payments up to the increased primary threshold for Class 1 NI (£12,570). Companies should also consider the impact of the increased EA and how it affects the total employers’ NI liability.
Utilizing the Employment Allowance: Companies should assess their eligibility for the increased EA of £5,000, as it can affect profit extraction planning. Single director shareholder companies can only benefit if they have at least one other employee paid above the primary threshold for at least one pay period in the tax year. Additionally, businesses with an employers’ NI liability exceeding £100,000 in the previous tax year cannot utilize the EA.
Preparing for Corporation Tax Changes: The main rate of corporation tax (CT) will increase from 19% to 25% from April 2023, affecting the after-tax profit available for distribution. Companies should plan ahead and consider the potential impact of this change on their profit extraction strategies.
The 2022/23 profit extraction changes necessitate a thorough review of current strategies to ensure companies maximize tax efficiency. Business owners should consult with financial advisors to adapt their salary and dividend mix, assess their eligibility for the increased employment allowance, and prepare for upcoming corporation tax changes. By staying informed and proactive, companies can effectively navigate the shifting landscape and optimize their profit extraction strategies. If you need more clarification on your employment status, please call our tax advisors on 08001357323 for specialist advice.