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This article has been updated following the announcements in the Spring Statement on 23^rd March 2022.

Changes in 2022/23 affecting the remuneration strategy for directors
There are some changes for the 2022/2023 tax year which starts on 6th April with the dividend tax rates all going up by 1.25% and the increase in Employer’s National Insurance (NI) threshold from £8,840 to £9,100. However, the personal allowance has remained at £12,570 and the basic rate band unchanged at £37,700.

So an annual salary (including bonuses) of £9,100 (or £758 monthly) will still mean neither you nor your company will pay NI, but the good news is you will still receive a full years NI credit to your state pension records.

Spring statement update

Following the Spring Statement the employment allowance will increase to £5,000 from £4,000 in the 2022/23 tax year.  The other significant announcement for payroll in the Spring Statement was that the Employee’s National Insurance (NI) threshold is going to increase to the same as the personal allowance of £12,570 but this will only come into place on 6th July 2022. This means that if you have more than one salaried director you could both receive £11,800 in 22/23 without paying any tax or NI if your company is eligible for employment allowance.

Top up in dividends
As a salary of £9,100 or £11,800 per year isn’t going to pay the bills, you will want to top this up with income which doesn’t count for NI purposes. Usually this means dividends, so you should pay regular dividends, say quarterly, at the most tax efficient level; this will depend on the tax free allowances and rate bands available to you.

Tax paid on your dividends

The amount you are able to take as a tax free dividend is the same as last year at £2,000. However, as noted earlier there has been an increase to the tax rate for dividends of 1.25% this mean for additional dividends you will now be charged tax at either 8.75% (within basic rate band), 33.75% (within higher rate band) and 39.35% (in the additional rate band).

So a director who now takes a salary of £9,100 and dividends as detailed below (with no other income) will have the following personal tax to pay;

Tips

Where you have other tax deductible allowances or reliefs, such as those given for personal pension contributions, you can increase the amount of dividends the company pays you and yet remains tax efficient.

• Ensure that your company is registered for payroll with HMRC and submits its RTI monthly to HMRC in advance of salary payment to ensure that you do not incur any penalties. JLA Accounting can help you with this.

Trap
Dividends can only be paid from company profits and so the low salary, high dividend strategy can’t be used where the company does not have sufficient profits to distribute.

The Scottish Government have introduced different tax rate bands for the 2022/23 tax year so if you are a Scottish tax payer then the personal tax amounts may differ for you. The effects on you and your business of the dividend rules can be complex so it is worth seeking tax advice to ensure you have the most tax efficient strategy in place. If you have any questions on this article and how it affects you and your business, please get in touch.

JLA Accounting Limited takes every care in preparing material to ensure that the content is accurate and up to date. However, no responsibility for loss for anyone acting from or refraining from acting as a result of this information can be accepted by JLA Accounting Limited.