An initial look at the factors in the dividend/salary decision in 2023/24, in the possibly vain hope that the dust has settled on U-turns to September’s ‘fiscal event’, shows dividends losing their attraction.
On 14 October, Liz Truss gave up on her goal of reversing Rishi Sunak’s 2023 increases to corporation tax rates. Although Truss told the Conservative Party Conference that “We are keeping corporation tax at 19%, the lowest in the G20”, this was somewhat disingenuous as the Finance Act 2021 had already provided for the increases. That meant she would have needed to overturn existing legislation, which would not have been easy. On 17 October, the dividend tax rate reductions proposed by Kwasi Kwarteng went the same way.
All of which means the calculations of bonus or dividend require recalculation once more. These latest examples take account of:
- The increase for companies with over £250,000 of profits in the rate of corporation tax to 25% from 1 April 2023.
- The ‘marginal relief provisions’ which will apply for companies with profits between £50,000 and £250,000. The effect of these is that 19% will apply to the first £50,000 of profits and 26.5% to the excess up to £250,000.
- The abolition of the 1.25% Health and Social Security Levy.
- The reduced national insurance (NIC) rates from 6 November 2022.
- The annual basis of calculation for the Class 1 NICs for directors, which means the cut in NICs seven months into 2022/23 results in averaged rates of 14.53% for a director’s employer and 12.73% and 2.73% for the director.
- Director with sufficient earnings to be a basic rate taxpayer, no available dividend allowance and bonus kept within basic rate band
| 2022/23 | 2023/24 on | |||||
| Bonus | Dividend | Bonus | Dividend | |||
| Marginal corporation tax rate | 19% | 19% | 19%-26.5% | 26.5% | 25% | 19% |
| Gross profit | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 |
| Corporation tax | N/A | (190) | N/A | (265) | (250) | (190) |
| Dividend payable | N/A | 810 | N/A | 735 | 750 | 810 |
| Employer’s NIC | (126.87) | N/A | (121.27) | N/A | N/A | N/A |
| Bonus | 873.13 | N/A | 878.73 | N/A | N/A | N/A |
| Director’s NIC | (111.15) | N/A | (105.45) | N/A | N/A | N/A |
| Tax | (174.63) | (70.88) | (175.75) | (64.31) | (65.63) | (70.88) |
| Net income | 587.35 | 739.12 | 597.53 | 670.69 | 684.37 | 739.12 |
The higher corporation tax rates are not enough to counter the savings in NICs, so the dividend continues to be the better option.
- Director with sufficient earnings to be a higher rate taxpayer (40%), no available dividend allowance and bonus kept within higher rate band
| 2022/23 | 2023/24 on | |||||
| Bonus | Dividend | Bonus | Dividend | |||
| Marginal corporation tax rate | 19% | 19% | 19%-26.5% | 26.5% | 25% | 19% |
| Gross profit | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 |
| Corporation tax | N/A | (190) | N/A | (265) | (250) | (190) |
| Dividend payable | N/A | 810 | N/A | 735 | 750 | 810 |
| Employer’s NIC | (126.87) | N/A | (121.27) | N/A | N/A | N/A |
| Bonus | 873.13 | N/A | 878.73 | N/A | N/A | N/A |
| Director’s NIC | (23.84) | N/A | (17.57) | N/A | N/A | N/A |
| Tax | (349.25) | (273.38) | (351.49) | (248.06) | (253.13) | (273.38) |
| Net income | 500.04 | 536.62 | 509.67 | 486.94 | 496.87 | 536.62 |
At the higher rate tax level, the dividend appears to be only the better option if marginal corporation tax is at 19%. 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 marginal income by between 8.5% and 19.6% more than the dividend will, implying a greater loss of allowance.
For example, consider a director with £100,000 of earnings in 2023/24 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:
| 2023/24 on | Bonus | Dividend | ||
| Marginal corporation tax rate | 19%-26.5% | 26.5% | 25% | 19% |
| Gross profit | 1,000 | 1,000 | 1,000 | 1,000 |
| Corporation tax | N/A | (265) | (250) | (190) |
| Dividend payable | N/A | 735 | 750 | 810 |
| Employer’s NIC | (121.27) | N/A | N/A | N/A |
| Bonus | 878.73 | N/A | N/A | N/A |
| Director’s NIC | (17.57) | N/A | N/A | N/A |
| Tax | (527.24) | (395.06) | (403.13) | (435.38) |
| Net income | 333.92 | 339.94 | 346.87 | 374.62 |
- Director with sufficient earnings to be an additional rate taxpayer (45%), no available dividend allowance
| 2022/23 | 2023/24 on | |||||
| Bonus | Dividend | Bonus | Dividend | |||
| Marginal corporation tax rate | 19% | 19% | 19%-26.5% | 26.5% | 25% | 19% |
| Gross profit | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 | 1,000 |
| Corporation tax | N/A | (190) | N/A | (265) | (250) | (190) |
| Dividend payable | N/A | 810 | N/A | 735 | 750 | 810 |
| Employer’s NIC | (126.87) | N/A | (121.27) | N/A | N/A | N/A |
| Bonus | 873.13 | N/A | 878.73 | N/A | N/A | N/A |
| Director’s NIC | (23.84) | N/A | (17.57) | N/A | N/A | N/A |
| Tax | (392.91) | (318.74) | (395.43) | (289.22) | (295.13) | (318.74) |
| Net income | 456.38 | 491.26 | 465.73 | 445.78 | 454.87 | 491.26 |
At the additional rate tax level, the dividend is again only the better option if marginal corporation tax is at 19%.
Comment
The new/retained corporation tax rates will make dividends less attractive in many instances, as does the retention of 1.25 percentage points higher dividend tax rates at all levels (not just basic rate).
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