Impact on owner managers of the 2022 Mini Budget

With Rishi Sunak now appointed as Prime Minister, just over 3 months since he resigned as Chancellor of the Exchequer, we review the current tax environment for business owners and how they can navigate the new tax landscape.

With multiple tax announcements, U-turns and Chancellors in recent weeks, it is helpful to understand where we are now and what else we might expect to see on further announcements in the coming weeks, particularly in the Autumn Statement on 17 November.

It seems a distant memory from when Philip Hammond announced in 2017 that we would move to just one Budget a year, every Autumn, to enable people to plan ahead.

We have set out in a separate article what has so far survived from Kwasi Kwarteng’s mini-Budget on 23 September 2022. The short answer is that very little survived.

There is just one major change from Rishi Sunak’s Spring Statement, which is that we will keep the 1.25% reduction in the rates of National Insurance contributions (NICs) from 6 November 2022, which will now revert to the levels they were at during the 2021/22 tax year.

Dividends tax

The dividend tax rates were also increased by 1.25% from 6 April 2022, as per Rishi Sunak’s Autumn 2021 Budget. This was to ensure equal treatment between salaries and dividends.

However, although the NIC rate is to be reduced by 1.25% from 6 November 2022, the dividend tax rates will remain at their current higher rates.

This differential has an impact on the decision process for shareholders in private companies as they decide how to withdraw funds from their business.

Extracting profits from a company

In recent years, depending on the level of profits and income, it has usually been marginally more tax efficient for business owners to withdraw profits from their business by dividends rather than salary.

2022/23 tax year

Considering the varying company and personal taxes that apply to salaries and dividends in this 2022/23 tax year:

for higher rate taxpayers (those earning between £50,270 and £150,000), the effective tax rate in taking profits out as salary has been 50.6%, and with dividends it was very slightly lower at 50.3%.
for additional rate taxpayers (those with income of more than £150,000), the respective effective tax rates have been 55.0% (salary) and 54.5% (dividends).

2023/24 tax year

If we consider the announcements made by Jeremy Hunt, from 6 April 2023, it becomes marginally more tax efficient to take a salary payment rather than dividends, with the rates for higher rate taxpayers being 49% and 50.3% respectively for salary and dividend.

For additional rate taxpayers the effective tax rates from 6 April 2023 will be 53.4% and 54.5% for salaries and dividends respectively.

This assumes that the 25% rate of corporation tax applies, but for companies with profits below £250,000, the position becomes more complicated by the small company rate of 19% and the application of marginal relief for profits between £50,000 and £250,000.

If companies are benefiting from the 19% corporate tax rate, it is likely to still be beneficial to take dividends rather than salary.

For basic rate taxpayers, assuming the small companies' rate of 19% applies, from 6 April 2023, the effective tax rate on salaries will be 40.2% and 26% on dividends. The larger difference here is accounted for by the 12% employee’s NIC payable on earnings up to £50,270.

Other factors to take into account

There are some other considerations to bear in mind if looking to take a salary over dividends –

For companies eligible to claim R&D tax credits, taking a salary payment could also enable a higher R&D refund.
Where dividend income reduces, this may mean that there is scope to reduce self-assessment payments on account, so helping tax cash flow.
Taking salary payments will increase relevant earnings for calculating the extent of pension contributions made by an individual.

The difference in effective tax rates is still marginal and the specific circumstances of the individual and their business should be carefully considered, as part of a longer-term plan.

Longer-term variables

There are also a number of longer-term variables in play that should be factored in beyond the immediate tax rates, including:

Retaining funds in a company might have an adverse impact on the availability of business property relief from inheritance tax
The ability to claim capital gains business asset disposal relief on a share sale could be affected.
Rather than paying salaries or dividends, it might be appropriate for companies to make employer pension contributions. Corporate tax relief can be claimed on eligible employer pension contributions and funds can then grow tax efficiently within a pension environment, subject to meeting various criteria.

Please contact your usual Bishop Fleming contact if you would like help in modelling the impact of these changes on you and your business as you plan for the future.

Uncertainty remains ahead of the Autumn Statement

Which areas are we still looking for certainty on?

There are still a few areas we will hopefully have greater certainty on soon, including:

Whether the 130% corporate tax Super Deduction will be extended beyond its 31 March 2023 expiry date. Jeremy Hunt has been silent on this to date.
Whether the new investment zones, with 10-year tax benefits, will still be brought in. Again, we have had no announcements on this.
Whether benefits will rise in line with inflation. We won’t know the outcome until 1the Autumn Statement.
Whether the SDLT reductions will still be with us in the longer term.

When Rishi announced his Spring Statement on 23 March 2022, the Office for Budget Responsibility predicted 3.8% growth in 2022 and 1.8% in 2023. We will have revised figures from the OBR for the Autumn Statement.

What we may see longer term in tax changes is unknown, but it does seem unlikely that we will see major reductions before the next general election.

While the Labour Party has been fairly quiet on tax policy since Sir Keir Starmer became the leader of the opposition, it is reasonable to assume that the tax rates will remain at or above their current levels for the foreseeable future.

Now may be the right time to assess and confirm that the tax plans for the shareholders and the company are fully aligned with the business plans and the economic environment.

We will have the next General Election on or before 24 January 2025.