Most small companies (thought to be six million) pay their owner-managers a basic salary through PAYE and a chunk of the profit by way of a dividend. Accountants, including my company, usually advised their clients to remunerate themselves this way over the last number of years. In most cases it meant less tax and NI compared to than paying all as salary.
Before 2016 when dividend rules were changed, no tax was payable on dividends from your own company on the premise that the profits had already been subject to corporation tax, so being taxed twice did not seem fair. The corporation tax rate for small companies fell from 42% in the 1970’s to its present 19%. Next year the rate increases to 25% for profits over £250,000. It stays at 19% however for profits up to £50,000 with a sliding scale in between.
Last tax year the income tax charged on money withdrawn from the company by means of a dividend was 7.5% with £2,000 tax free. This tax year it is 8.75%. Sunak and Hunt are considering a further increase of 1.25% for next year taking it to 10%. They are also considering reducing the tax-free amount to £1,000.
A basic rate taxpayer will pay £700 income tax this year on a £10,000 dividend. Under the proposals the amount will rise to £900 in 2023-24. Higher earners will pay much more in both income tax and corporation tax, up to possibly 55%.
