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Mind your allowances

Mind your allowances

Reductions to some tax allowances and the freezing of others will hit many individuals and businesses hard. The tax changes for 2023/24 also require a rethink of the strategy for small company owners of drawing income as dividends rather than salary.
Dividends and corporation tax

Until fairly recently, it was usually beneficial for tax for shareholder directors to take dividends instead of bonuses, because dividends are taxed at lower rates than earnings. However, from 1 April 2023:

  • the main rate of corporation tax (CT) jumped from 19% to 25%;
  • companies with profits up to £50,000 remain subject to 19% CT;
  • in effect most companies with profits between £50,000 and £250,000 pay CT at 26.5% on profits between these limits.

For income tax, from 6 April 2023:

  • only the first £1,000 of dividends an individual receives is tax free, down from £2,000;
  • the 45% additional rate (39.35% on dividends and 47% top rate for Scottish non-dividend, non-savings income) is charged on income over £125,140 (previously £150,000).

For higher rate and additional rate taxpayers these changes largely remove the tax benefit of paying dividends out of company profits above £50,000.

Even at £1,000, the tax-free dividend allowance should not be overlooked. But remember to take into account dividends received from other investments, because these might have used all or part of the allowance.

Capital gains changes

The biggest cut has been to the capital gains tax (CGT) annual exempt amount (AEA), which for individuals is now £6,000 and will fall to £3,000 from April 2024. If you are married or in a civil partnership, spreading investments between you will double up on the exempt amount.

The reductions in the AEA and dividend tax-free allowance increase the attraction of investing in pensions and ISAs, because income and gains within these wrappers are exempt from tax.

The ISA subscription limit for 2023/24 remains at £20,000, but key pensions annual allowances have increased. Remember you need salary or self-employment income to support pension contributions.

Newsletter Apr/May 2023
Newsletter Apr/May 2023
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