The Budget confirmed that the main rate of corporation tax will rise from 19% to 25% on 1 April 2023 but the small profits tax rate will stay at 19% where the company’s profits do not exceed £50,000.
The Chancellor failed to highlight that the effective marginal rate of corporation tax will be 26.5% on profits in the marginal relief band between £50,000 and £250,000. This band can start at a much lower level as those profit thresholds are divided by the total number of associated companies and are also reduced if the company’s accounting period is shorter than 12 months.
There are several measures that the directors of a family company can take to avoid the high marginal tax rate of 26.5% which we can help you consider.
First we can check how many companies your company is associated with. Any dormant companies can be ignored, as can passive holding companies which do nothing other than pass dividends through to shareholders. Working out which companies are associated can be complicated where family members each run their own companies.
Next we consider how much of the profit you need to extract from your company and whether those payments will reduce the taxable profits below £50,000. Salary and pension contributions will reduce taxable profits but dividends will not.
In the past you may have taken a modest salary with the rest of your cash needs paid out in the form of dividends, which are taxed at a lower rate and are not subject to national insurance contributions (NIC).
Taking a higher salary may be tax-efficient if it brings your company’s taxable profits into the 19% band but we also need to consider the employer’s NIC burden on your salary where the £5,000 employment allowance is not available.
If you do not need to extract funds immediately from your company, consider asking the company to make an employer pension contribution instead as this will reduce taxable profits and is not subject to NIC. As long as your total remuneration package including pension contributions is reasonable for the work you do HMRC will not normally challenge the payment of pension contributions by the company.