2022-23 Tax planning for owner-managed companies

Key Tax changes from the Spring Statement

• Employment allowance has been increased to £5,000 p.a.
• The threshold for paying employee National Insurance has increased to £12,570, however because of the late announcement, this will effectively be £11,908 as the change will not be implemented until 6 July 2022
• The threshold for paying employer National Insurance is lower at £9,100 p.a.
• The National Insurance increase of 1.25% on both employee and employer national insurance will go ahead from 6 April 2022. Employee national insurance rate will rise to 13.25% and employer national insurance rate to 14.25%
• There is also a 1.25% increase on dividend tax rates from 6 April 2022 (basic rate will increase to 8.75%, higher rate to 33.75% and additional rate to 39.35%)
• The basic rate tax threshold in England, Northern Ireland & Wales and Scotland remain the same. More details are given in the table below

So what needs to be considered?

• 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?

How can owner managers plan the most tax efficient strategy?

Sole director companies 

• For 2022-23 a sole director should pay a salary just over the primary National Insurance threshold of £11,908. A round amount is therefore £995 per month. Given the increase in the National Insurance rate, this will minimise national insurance contributions
• Then withdraw any further cash from the company via dividend on which dividend is taxed at basic rate (8.25%) or higher rate (33.75%) after the dividend allowance of £2,000
• There will be National Insurance to pay by April 2022 of £409.  By paying National Insurance there will be a qualifying year for State pension.
• There will be an impact on income tax with more dividend income being paid – if the income tax payable 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))

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 £11,940 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))

For companies owned by two or more directors, the more complex income tax system for Scotland 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 2022-23.

Basic Scenario

I have modelled a scenario for a Limited company, with both directors owning a 50% share of the company each.   Based on two different operating profit levels of £30,000 and £70,000, the optimum tax/ dividend split is to pay a £11,940 annual salary to both directors out of the Limited company and extract any further cash out of the company as dividend which will be split equally.

The UK basic rate threshold (as opposed to the Scottish threshold) of £50,270 (£37,700 + £12,570 personal allowance) will apply because dividend income is savings income.

In this scenario, £100,540 profits can be extracted out of the company at basic rate and the corporation tax liability will be reduced by £2,388 per individual salary.  The employee National Insurance payment due will be £4 each i.e. £8 in total, payable quarterly in January and April 2023 (employment allowance is available for Employer National Insurance).

A summary of relevant tax rates for Scottish registered companies in 2022-23 is shown below:

	£
Personal allowance	12,570
Scottish intermediate rate threshold (for earned income not savings income)	31,092
UK-wide basic rate threshold (for savings income e.g. dividends)	37,700
Class 1 National Insurance rate – employee	13.25%
Class 1 & 4 National Insurance primary threshold (no employer National Insurance payable below this threshold)	£12,570
Class 1 National Insurance secondary threshold	£9,100
Dividend allowance –nil rate	£2,000
Dividend tax rate –basic	8.25%
Dividend tax rate –higher rate	33.75%
Dividend tax rate -additional rate (dividends over £150,000)	39.35%
Scottish starter tax rate (earnings up to £2,162)	19%
Scottish basic tax rate (earnings from £2,163 to £13,118)	20%
Scottish intermediate tax rate (earnings from £13,119 to £31,092)	21%
Scottish higher tax rate (earnings from £31,093 to £150,000)	41%
Scottish top tax rate	46%