2023-24 Tax planning for owner-managed companies

So, the key message for SME’s from the 2023 Spring statement announced on 15 March 2023 is: brace yourselves!

Corporate Tax is getting more complicated and it’s not a rosy picture in terms of tax burdens. The change in corporation tax rates will also be an administrative burden on owner-managed companies and their accounting advisers. It will make tax planning more difficult as there are knock on effects in terms of different taxes (corporation, employment and personal tax) which advisers must explain to you .

Key Tax changes from the Spring Statement

• Corporation tax rates change from 1 April 2023 as follows:
  • 19% on annual profits up to £50,000
  • 25% where annual profits are above £250,000
  • Marginal relief available for companies with profits between £50,001 and £250,000
  • The marginal relief works out at those companies being charged 19% on £50,000 of profits and then 26.5% on profits between £50,001 and £250,000
• Associated companies become important as they will reduce the threshold at which smaller profits rate of 19% is paid
• Dividend allowance has reduced to £1,000 from 6 April 2023
• The annual investment allowance on qualifying assets will be permanently set at £1 million which is great news for larger SME’s
• Companies can claim 100% tax relief on qualifying new main rate plant and machinery investments (i.e. from from 1 April 2023 until 31 March 2026) in addition to AIA
• Employment allowance remains at £5,000 p.a.
• The threshold for paying employee National Insurance remains at £12,570,
• The threshold for paying employer National Insurance is lower and remains at £9,100 p.a.
• The National Insurance rates have dropped back to 12% for employees and 13.8% for employer National Insurance from 6 April 2023
• Dividend tax rates remain the same as for 2022-23 (basic rate at 8.75%, higher rate: 33.75% and additional rate: 39.35%)
• The basic rate tax threshold in England, Northern Ireland & Wales and Scotland remain the same as for 2021-22 and 2022-23 (i.e. no inflationary increase). Scottish higher rates of tax have increased by 1 percentage point. More details are given in the table below

So what needs to be considered?

• Owner managed companies need to look at the balance of taxes -corporation tax, employment and income (personal) tax and decide what their tax planning aim is: is this to reduce overall tax? If so, this will change depending on profit levels so forecasting profit is very important
• The directors can produce their own profit forecast or ask for assistance with this from their adviser
• Is having a qualifying year for National Insurance for state pension purposes relevant? In which case, the director must be paid a salary just above the primary threshold of £12,570 which will result in a small amount of employee National Insurance being paid
• If company profits are forecast below £50,000 or above £250,000, then tax planning is more straight forward as there is no benefit in looking at measures to reduce profits and hence the high marginal rate of tax (26.5%)
• Does the company have one or many directors?  If many, then the employment allowance for employer national insurance is available  (as long as the directors are paid above the secondary threshold for Employer National insurance). Employment allowance will reduce the amount of employer national insurance that needs to be paid by up to £5,000 p.a.
• Does the company owner have a spouse who has an unused portion of basic rate allowance? Is the spouse involved in the business and could therefore be paid a salary?
• There are family law considerations here but a husband and wife may wish to split shareholdings to maximise use of basic rate thresholds
• Owner managed companies should ensure they are aware of the tax treatment of company expenses such as working from home allowance, staff entertaining costs, purchase of 100% electric vehicles or business vans etc. This is where an adviser adds value to you

How can owner managers plan the most tax efficient strategy?

Sole director companies (company profits up to £50,000) 

• For 2023-24 a sole director should pay a salary just over the primary National Insurance threshold of £12,570 if a qualifying year for National Insurance is important for state pension. This equates to £1,049 per month. If state pension is not a concern, then a lower salary of £9,100 p.a. is appropriate
• If the sole director has other earned income, this and company forecast profits need to be taken into account when setting a suitable company salary
• Then withdraw any further cash from the company via dividend -the dividend is taxed at basic rate (8.25%) or higher rate (33.75%) after the dividend allowance of £1,000
• There will be National Insurance to pay in total of £481.  By paying National Insurance there will be a qualifying year for State pension.
• If the income tax payable as a result of dividend income exceeds £1,000,  payments on account will need to be made in January and July of each year which have a cash flow impact in the first year of making payments on account. This is because there is a switch to HMRC collecting income tax in advance as opposed to arrears.

Sole director plus employee(s)) (company profits up to £50,000)

Where the company has a sole director and shareholder but also has employees (earning above the secondary National Insurance threshold), the director should be remunerated with a £12,570 annual salary and further profits extracted by way of dividend, as long as the director does not have other income classed as earned income (which would be subject to the Scottish income tax rates).

Companies owned by  multiple directors (or director plus employee(s)) and with profits over £50,000

For companies owned by two or more directors or companies with profits between £50,000 and £250,000, the more complex income tax system for Scotland and also the change in corporation tax rates from 1 April 2023 now means tax planning must be done specific to their particular personal circumstances.

Where a company is owned and managed by more than one director, existing sources of income (e.g. rental property, investment income) need to be considered for each specific director and, if relevant, their spouse and this may have an influence on how to set salary and dividend payments for the company for 2023-24.

2023-24 Relevant Tax rates

A summary of relevant tax rates for Scottish registered companies in 2023-24 is shown below:

	£
Personal allowance	12,570
Scottish intermediate rate threshold (for earned income not savings income)	31,092 + personal allowance = 43,662
UK-wide basic rate threshold (for savings income e.g. dividends)	37,700 + personal allowance = 50,270
UK-wide additional rate threshold	125,140
Class 1 & 4 National Insurance primary threshold and rates	12,570 (12% Class 1, 9.73% Class 4 up to £50,270 profits & 2.73% over this amount)
Class 1 National Insurance secondary threshold (& employer National Insurance rate)	9,100 (13.8%)
Dividend allowance –nil rate	1,000
Dividend tax rate –basic	8.25%
Dividend tax rate –higher rate	33.75%
Dividend tax rate -additional rate (dividends over £125,140 if no other income)	39.35%
Scottish starter tax rate (earnings up to £14,732) *	19%
Scottish basic tax rate (earnings from £14,733 to £25,688) *	20%
Scottish intermediate tax rate (earnings from £25,689 to £43,682) *	21%
Scottish higher tax rate (earnings from £43,683 to £125,400) *	42%
Scottish top tax rate	47%

* includes personal allowance of £12,570 on which no tax is paid. If earnings are above £100,000, the Personal Allowance will reuce by £1 for every £2 earned over £100,000.