Dividends taxation in 2023/24
If you have a personal or family company, taking dividends is a popular and tax-efficient way to extract profits. However, while they remain tax efficient, recent tax changes have eroded some of the advantages.
What do you need to know when planning your extraction strategy for 2023/24?
Impact of corporation tax changes
From 1 April 2023, changes were made to the way in which corporation tax is calculated. If your profits are more than £50,000, you will pay corporation tax at a higher rate than prior to that date, reducing the post-tax profits that you have available to pay as a dividend.
Remember, dividends are paid from retained profits and you can only pay if you have sufficient retained profits from which to pay it. Even if your profits are unchanged, you may not be able to maintain previous payments if your effective rate of corporation tax rises from 1 April 2023.
Reduction in the dividend allowance
All individuals, regardless of the rate at which they pay tax, are entitled to an allowance. This was set at £2,000 for 2022/23 but is halved to £1,000 for 2023/24. It is to be further reduced to £500 for 2024/25.
This allowance operates as a zero-rate band. Dividends which are covered by the allowance are taxed at a zero rate, but the allowance uses up some of the tax band in which they fall (taxed as the top slice of income). The reduction in the allowance will reduce the profits that can be extracted free of further tax.
In a family company, an alphabet share structure is often used to facilitate the payment of dividends to family members whose allowance would otherwise be wasted, increasing the profits that can be extracted tax-free. This strategy may need reviewing in light of the falling dividend allowance.
Dividend tax rates
Dividends are attractive as their tax rates are lower than the income tax rates. However, it should be remembered, that corporation tax has already been paid on the profits which are paid out as dividends.
The dividend tax rates were increased by 1.25 percentage points from 6 April 2022 pending the introduction of the now-cancelled Health and Social Care Levy. Although the Health and Social Care Levy is not going ahead, the tax rates are to remain at the increased levels for 2023/24.
Consequently, dividends are taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band.
Additional rate threshold
The dividend additional rate will apply if dividends are paid in excess of the allowance and taxable income exceeds the additional rate threshold. This is reduced to £125,140 for 2023/24 from £150,000.
As a result of these changes, you may have less profits available from which to pay dividends. Where dividends are paid, only £1,000 will be tax-free. Above this level, dividends will continue to be taxed at the higher rates introduced from April 2022. Further, the additional rate will now bite where taxable income exceeds £125,140.
For more information about please visit the official government website.
The information available on this page is of a general nature and is not intended to provide specific advice to any individuals or entities. We work hard to ensure this information is accurate at the time of publishing, although there is no guarantee that such information is accurate at the time you read this. We recommend individuals and companies seek professional advice on their circumstances and matters.