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Remuneration planning

by Becky Dunbar

Whether you’re an employer looking to pay your staff more effectively or an individual looking at the most tax efficient way to structure your own payment package, careful remuneration planning can help you achieve your goals whilst saving tax.

The main benefits of remuneration planning are:

  • extracting profit from your business in the most tax efficient way
  • providing a competitive remuneration package, which is vital in a competitive market for talented individuals
  • mitigating tax liabilities.

Typically, remuneration packages are made up of a combination of salary and dividends. By taking a salary, individuals can build towards a state pension, make higher pension contributions and have some certainty of an income even when there is no profit. Salaries are also a tax-deductible expense for the business provided it is ‘wholly and exclusively’ for the purpose of trade. However, this of course also brings higher rates of income tax and both employer and employee National Insurance Contributions when over the various thresholds.

By taking dividends, individuals can benefit from lower tax rates and no NICs are due on these. The drawback is that dividends can only be paid out of a business’ profits once corporation tax has been paid.

Rate Band  Income tax rates  Dividend tax rates
Basic rate 20% 8.75%
Higher rate 40% 33.75%
Additional rate 45% 39.35%

Therefore, it is very common to take a low salary and top up your income through dividends. This allows the individual to gain benefits from each.

As announced in the Autumn Statement on 17 November 2022, the dividend allowance for individuals which allows the first £2,000 of dividend income to be received free of Income Tax, will be reduced from 6 April 2023 to £1,000 and reduced further to £500 from 6 April 2024. This means that even if you took the same amount of dividends each year, there will be a higher tax liability on these dividends if taken after 5 April 2023.

It was also announced that there would be a reduction in the additional rate threshold for individuals from £150k to £125,140. Therefore, after the 5 April 2023, if your taxable income is £125,140 or more, you will become an additional rate taxpayer and up to an additional £24,860 of income will now be taxed at 45%.

This threshold, along with the fact that the personal allowance is withdrawn when your income exceeds £100,000, is why planning ahead for your remuneration can be vital.

Looking at an individual whose dividend income is £150,000, we can see that there is a slight increase in the income tax liability after 5 April 2023 due to the points mentioned above.

Before 5 April 2023
(2022/23 Tax year)
After 5 April 2023
(2023/24 Tax year)
Dividend income £150,000 £150,000
Income Tax (£52,060) (£53,503)
Net income £97,940 £96,497

The Autumn Statement 2022 also announced changes to the corporation tax rate; from April 2023, corporation tax rate will increase from 19% to 25%. Although this will not affect how dividends are taxed on the individual, it will reduce the amount of distributable reserves in the company, meaning there will be less available to pay as a dividend.

Looking at a company whose profit is £150,000 it is clear that a higher amount of distributable reserves would be available pre-April 2023 compared to after, due to the rise in corporation tax rates from 19% to 25%.

Before 5 April 2023
(2022/23 Tax year)
After 5 April 2023
(2023/24 Tax year)
Company profits £150,000 £150,000
Corporation Tax (£28,500) (£37,500)
Dividend distribution £121,500 £112,500

In light of these changes, and the above examples, it is therefore advisable to speak to your Rickard Luckin contact to discuss remuneration planning, in particular looking to bring forward any dividends you’re intending to draw to take advantage of the current rates and allowances.

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