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Spring Budget 2021 – Profit Extraction

Author Image The Technical Team
2 minutes read
Last updated on 3rd Mar 2021

Overview

From the 2023/24 financial year the rate of corporation tax will increase to a maximum of 25%.

What did the Chancellor say?

The chancellor announced from the 2023/24 financial year, the rate of Corporation Tax will increase to 25%, which will remain the lowest rate in the G7.

Businesses with profits of £50,000 or less, which is around 70% of actively trading companies, will continue to be taxed at 19%. A tapered rate will also be introduced for profits above £50,000, so that only businesses with profits of £250,000 or greater will be taxed at the full 25% rate. 

What does this mean for the planner?

Accountants deal with large businesses, but the financial planner will often be involved with small to medium sized business owners and those with personal service companies.

The relative taxation of salary, including NI, dividends and pensions plays a key role in determining their remuneration strategies. So these change will obviously have an impact.

Before any dividend can be paid corporation tax must be paid first. So, on a simple comparison of £1,000 of profit, under 19% corporation tax £810 is available to be paid as a dividend. This reduces to a minimum of £750 when the new rates commence. Therefore, as there is less post corporation tax profit to pass on, dividends from companies with higher rates of corporation tax will see lower income for the business owners.

Limited company owners may be particularly affected if they are looking to extract all of their profit in year, which would normally be a combination of low salary/high dividend. This may need amended to a model where in year profits are taken entirely as salary. Many may be considering if they should switch from a dividend to a salary strategy given these changes. There are several years to decide on this, however, initial analysis suggests they would need a profit in the millions before this becomes attractive.

Given the higher rates of overall taxation some will see with profit extractions through the dividends route, this makes the redirection of profits into the pension system more attractive, with only those dividends needed for immediate income needs extracted. 

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.