In recent years, many business owners and directors have sought tax-efficient ways to extract profit from their family companies. The most common strategy was to pay a modest salary, often aligning with the £12,570 personal allowance, while taking the remaining income through dividends.
The question remains – is this the most advantageous approach for saving money and maximising profits?
In this blog, we delve into the changes in tax rules to help you make informed financial decisions for your business. Read on to discover the key factors and considerations in this ongoing discussion.
How the changes in 2023/24 Corporation Tax May Affect Your Tax Strategy?
The landscape of profit extraction from your family company is shifting due to changes in the Corporation Tax rate. In the March 2021 Budget, it was announced that in April 2023, the main rate of Corporation Tax would increase to 25%, marking the first such rise in five decades.
However, it’s important to note that this rate increase won’t affect all companies uniformly. For companies with profits below £50,000, the rate will remain at 19%, designating it as the ‘small profits rate.’ In the case of companies with profits falling between £50,000 and £250,000, a ‘marginal relief’ system will be in place, effectively resulting in a 26.5% tax rate on profits exceeding £50,000.
Profit Bands | Applicable Tax Rate |
£0-£50,000 | 19% |
£50,000 to £249,999 | 26.5% |
Over £250,000 | 25% |
If your company’s profits exceed the £50,000 threshold, you might find it more tax-efficient to explore alternative strategies. This could involve increasing your salary or incorporating a bonus in the company’s accounts. Additionally, considering options like increased pension contributions or providing an electric company car can also offer tax-efficient alternatives.
We Are Here to Help
Choosing the right profit extraction strategy is a complex decision influenced by various factors, such as your company’s profit levels and your personal financial needs.
To receive tailored advice that aligns with your unique circumstances, we recommend scheduling a meeting with us a couple of months before your company’s year-end. This proactive approach ensures that you receive the most informed and beneficial guidance for your financial planning.
