Use the allowances available to draw profits from you business or risk losing them
In his Autumn statement in November 2022 Chancellor Hunt announced cuts to the dividend allowance and the additional rate threshold, which will impact those who are planning to extract profits from their own companies.
The tax-free dividend allowance will be halved from £2,000 to £1,000 on 6 April 2023. This will affect companies where the shareholding has been spread over various family members to take advantage of £2,000 of tax-free dividends per person. The rates of tax on dividends received, in excess of this allowance, have not been increased, but that could change in the Budget on 15 March 2023.
Directors of family company clients should talk to us about their planned dividend payments for the rest of this tax year.
There are other ways of extracting profit from family companies, for example as rent, interest or pension contributions. The first two methods require the shareholder to have lent property or funds to the company, so are difficult to arrange at short notice and if the shareholder doesn’t hold significant assets.
Pension contributions can be paid by the company to any employee or director, as long as the total remuneration package for that person is reasonable for the work they perform. HMRC offers no guidance as to what is ‘reasonable’ so employers should use their own judgement. Employer contributions are currently very tax efficient as they are tax deductible for the company and don’t carry NIC. This offers a potential Corporate Tax saving of up to 25% on contributions made from 6th April 2023.
However, the taxpayer needs make sure they don’t exceed their pension annual allowance (generally £40,000) and their lifetime allowance (frozen at £1,073,100 for the last three years). Don’t forget that taxpayers have a carry forward allowance for any tax years where they have contributed less than £40,000 (total of employer contribution + grossed up employee contribution) for the 3 years preceding the current tax year. This offers a potential pension contribution opportunity of £120,000 in unused carry forward allowances and £40,000 in the current tax year.
We are not authorised to give investment advice but we can explain the tax advantages and traps for paying pension contributions in general and help with planning contributions.
The cut in the additional rate threshold from £150,000 to £125,140 on 6 April 2023 will only affect high earners, but our clients should be alert to this tax increase.