The social care announcement on 7 September 2021 increased both national insurance (NICs) and dividend tax from 2022/23.
In addition, the March Budget revised corporation tax rates from 2023/24. The combined effect of these announcements might shift the decision of whether to take a dividend or not from your business.
We have looked at some examples to see where these shifts might have taken place.
Example 1: Director with sufficient earnings to be a basic rate taxpayer, no available dividend allowance and bonus kept within basic rate band
2021/22 |
2022/23 on |
2022/23 |
2023/24 onwards |
||||
Bonus |
Dividend |
Bonus |
Dividend |
Dividend |
|||
Corp tax rate |
19% |
19% |
19% |
19% |
26.5% |
25% |
19% |
£ |
£ |
£ |
£ |
£ |
£ |
£ |
|
Gross profit |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
Corporation tax |
N/A |
(190.00) |
N/A |
(190.00) |
(265.00) |
(250.00) |
(190.00) |
Dividend payable |
N/A |
810.00 |
N/A |
810.00 |
735.00 |
750.00 |
810.00 |
Eer’s NIC |
(121.27) |
N/A |
(130.81) |
N/A |
N/A |
N/A |
N/A |
Bonus |
878.73 |
N/A |
869.19 |
N/A |
N/A |
N/A |
N/A |
Eee’ s NIC |
(105.45) |
N/A |
(115.17) |
N/A |
N/A |
N/A |
N/A |
Tax |
(175.75) |
(60.75) |
(173.84) |
(70.88) |
(64.31) |
(65.63) |
(70.88) |
Net income |
597.53 |
749.25 |
580.18 |
739.12 |
670.69 |
684.37 |
739.12 |
The higher NIC rates more than counter the extra dividend tax, so the dividend continues to be the better option.
Example 2: Director with sufficient earnings to be a higher rate taxpayer, no available dividend allowance and bonus kept within higher rate band
2021/22 |
2022/23 on |
2022/23 |
2023/24 onwards |
||||
Bonus |
Dividend |
Bonus |
Dividend |
Dividend |
|||
Corp tax rate |
19% |
19% |
19% |
19% |
26.5% |
25% |
19% |
£ |
£ |
£ |
£ |
£ |
£ |
£ |
|
Gross profit |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
Corporation tax |
N/A |
(190.00) |
N/A |
(190.00) |
(265.00) |
(250.00) |
(190.00) |
Dividend payable |
N/A |
810.00 |
N/A |
810.00 |
735.00 |
750.00 |
810.00 |
Eer’s NIC |
(121.27) |
N/A |
(130.81) |
N/A |
N/A |
N/A |
N/A |
Bonus |
878.73 |
N/A |
869.19 |
N/A |
N/A |
N/A |
N/A |
Eee’ s NIC |
(17.57) |
N/A |
(28.25) |
N/A |
N/A |
N/A |
N/A |
Tax |
(351.49) |
(263.35) |
(347.68) |
(273.38) |
(248.06) |
(253.13) |
(273.38) |
Net income |
509.67 |
546.75 |
493.26 |
536.62 |
486.94 |
496.87 |
536.62 |
At the higher rate tax level, from 2023/24 dividends look like the better option if corporation tax is not at the marginal rate. However, this may not always be the case where the £100,000 threshold for personal allowance taper comes into play, because for each £1 of gross profit, the bonus will increase the director’s total income by more than the dividend will, implying a greater loss of allowance.
For example, consider a director with £100,000 of earnings who loses £1 of allowance for each additional £2 of income up to £125,140 of total income. The director pays an effective marginal rate of 60% (40% + 40% x .5) on bonus or 53.75% (33.75% + 40% x .5) on dividend until the taper band ends:
Bonus |
Dividend |
|||
Corp tax rate |
19% |
26.5% |
25% |
19% |
£ |
£ |
£ |
£ |
|
Gross profit |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
Corporation tax |
N/A |
(265.00) |
(250.00) |
(190.00) |
Dividend payable |
N/A |
735.00 |
750.00 |
810.00 |
Eer’s NIC |
(130.81) |
N/A |
N/A |
N/A |
Bonus |
869.19 |
N/A |
N/A |
N/A |
Eee’ s NIC @ 3.25% |
(28.25) |
N/A |
N/A |
N/A |
Tax @ 60%/53.75% |
(521.51) |
(395.06) |
(403.13) |
(435.38) |
Net income |
319.43 |
339.94 |
346.87 |
374.62 |
Example 3: Director with sufficient earnings to be an additional rate taxpayer, no available dividend allowance
2021/22 |
2022/23 on |
2022/23 |
2023/24 onwards |
||||
Bonus |
Dividend |
Bonus |
Dividend |
Dividend |
|||
Corp tax rate |
19% |
19% |
19% |
19% |
26.5% |
25% |
19% |
£ |
£ |
£ |
£ |
£ |
£ |
£ |
|
Gross profit |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
1,000.00 |
Corporation tax |
N/A |
(190.00) |
N/A |
(190.00) |
(265.00) |
(250.00) |
(190.00) |
Dividend payable |
N/A |
810.00 |
N/A |
810.00 |
735.00 |
750.00 |
810.00 |
Eer’s NIC |
(121.27) |
N/A |
(130.81) |
N/A |
N/A |
N/A |
N/A |
Bonus |
878.73 |
N/A |
869.19 |
N/A |
N/A |
N/A |
N/A |
Eee’ s NIC |
(17.57) |
N/A |
(28.25) |
N/A |
N/A |
N/A |
N/A |
Tax |
(395.43) |
(308.61) |
(391.14) |
(318.74) |
(289.22) |
(295.13) |
(318.74) |
Net income |
465.73 |
501.39 |
449.80 |
491.26 |
445.78 |
454.87 |
491.26 |
At the additional rate tax level, the dividend is again the better option if corporation tax is not at the marginal rate.
The new NIC and dividend tax rates make dividends marginally more attractive in many instances. These are just examples, and you should seek expert advice should you have to make this decision.
If you want to find out more, feel free to book a free no-obligation chat here.
