Where does the mini-budget mayhem leave owner-managed businesses?
Following his appointment as Chancellor on Friday, Jeremy Hunt has wasted no time in undoing almost all of the 'mini-budget' tax measures announced by his predecessor Kwasi Kwarteng, only three weeks ago.
With the U-turns coming thick and fast, it is difficult to know just which direction to take and owner managers will, in particular, be impacted as they make decisions regarding profit extraction versus reinvestment.
Here's a recap on how things currently stand:
- Additional 45% rate of Income Tax to remain
- Corporation Tax will rise to 25% from 1 April 2023
- Basic rate of Income Tax to remain at 20% indefinitely
- 1.25% National Insurance increase scrapped from 6 November 2022
- The dividend tax cut scheduled for April 2023 has been scrapped. That means dividend taxation will remain at the current rates of 8.75%, 33.75% and 39.35% for basic, higher and additional rate tax payers, respectively.
So what does this mean for you and your business?
Historically dividends have been a more tax efficient remuneration option than bonuses, in most cases. However, the combined impact of the rate changes above are likely to narrow the gap between the effective tax rates for dividends versus bonuses from 6 April 2023. This might result in more profits being retained by companies.
There are, of course, other factors which should be taken into consideration as part of an owner-manager’s remuneration strategy and, as always, we will be reviewing what is best for clients based on their individual circumstances.
The 19% rate will continue to apply to companies with profits of up to £50,000, with marginal relief for profits of up to £250,000 as originally planned. While the corporation tax rate rise means companies with higher taxable profits will pay more, companies with brought forward losses could benefit by planning ahead.
It will be interesting to see whether there are any further significant changes to other taxes and reliefs when the Chancellor delivers his Medium-Term Fiscal Plan on 31 October. We will continue to keep an eye on developments and help clients navigate their way through these challenging times.
For more advice on how to deal with the changes outlined contact Jon Miles or you can call us on 01225 325580.