Unsurprisingly, the consequence of this is that payments of dividends or bonuses after 5 April 2023 may be subject to more tax in the hands of the individual than if paid before that date – however higher earners who have already maximised their allowances and tax rates for the current tax year will not see a benefit in advancing payments over the next few months.
The issue will be whether the ‘middle earners’ who might benefit will have the time and resources to quantify and consider what they want to do in order to achieve relatively modest savings.
Do you pay NI on dividends?
Kwasi Kwarteng’s mini-Budget in September seems a lifetime ago and the only tax saving which remains from it is the abolition of the proposed Health and Social Levy so that employees will not have to pay the additional 1.25% which would otherwise have been due. An equivalent increase in National Insurance contributions (NICs) remains in place for the remainder of this year so there is small benefit in delaying bonus payments until after 5 April, provided that those bonuses won’t take you into the 45% income tax rate sooner.
What is the high rate dividend tax?
You may remember that Kwasi Kwarteng proposed abolishing the 45% rate but reversed the proposal within days. By contrast, Jeremy Hunt has announced that the threshold at which that additional rate will apply will drop from £150,000 to £125,140 from 6 April 2023, so that more taxpayers will be paying the highest rate of tax. If your income is around that level, receiving a bonus within those levels before 5 April will save as you much as £1,243, albeit offset by the additional NICs charge.
How much dividend can I take?
If you’re considering dividend payments instead, there is also a small advantage in paying these before 5 April. Currently, taxpayers can receive dividend income of up to £2,000 without incurring a tax charge, but this dividend allowance will halve to £1,000 from April 2023 and then halve again from April 2024. This means that even relatively modest dividend payments will be taxable and will also be liable to the additional dividend rate of 39.35% at the new lower threshold of £125,140. If your total income is around those levels and you have dividend allowance available, receiving £1,000 before April will be tax free but could have a tax charge of £395 after April.
Longer term, the position does not look any brighter. Confirmation that other personal tax thresholds and allowances will not be decreased may seem like good news, but the fact that they will be frozen until April 2008 will mean that most people will pay more tax as any wage increases will not be matched by inflationary increases in allowances.
In addition, many individuals manage their investments to realise capital gains within their annual exempt amount – this is currently £12,300 but will more than halve to £6,000 from April 2023 and halve again to £3,000 from April 2024. A gain of £12,000 on a disposal of shares before April will be tax-free but potentially subject to capital gains tax of £1,200 from April 2023 and £2,400 from the following year.
Owner-managers will always need to consider the impact of payments on their business. Bonuses are deductible from a company’s profits whereas dividends are not. If your company will become liable to the increase to the higher corporation tax rate of 25% from April 2023, then you will get 6% more relief by delaying payment until then – smaller companies (as defined) or those will less profits and subject to the 19% rate will not see a difference. Unincorporated businesses have more complicated issues to consider – it is not as straightforward as spending more this tax year and earning less next year, particularly with the spectre of basis period reform around the corner.
In addition, there are procedures which should be followed for the payment of either bonuses or dividends. Getting it wrong could mean that a taxable date is triggered before the end of the tax year. Even a small family company will need to consider payments in the light of policies for other employees and shareholders. It is always good practice to take advice as the extent of the saving should be quantified and compared with the potential disadvantage of deferring the income at a time when even wealthy individuals may be affected by the cost-of-living increases. It will generally be worth ‘crunching the numbers’.