On 8 September 2021, the Prime Minister outlined the Government’s plans for health and social care, including a new funding strategy designed to meet social care costs. The plans include increasing National Insurance for employers, employees and the self-employed by 1.25% for 2022/23 only, before launching a new social care levy of 1.25% from April 2023, and raising the dividend tax rates by 1.25% from April 2022.
For clients with personal and family companies, extracting profits as dividends once a small salary has been taken is a tax-efficient strategy. One of the advantages of taking dividends rather than a higher salary is that dividends do not attract National Insurance. As the salary level is typically set at a level such that little or no National Insurance is payable, the planned increase in the dividend tax will have the effect of collecting a social care levy from clients who effectively pay for themselves in dividends. However, it will also affect clients with share portfolios, who may also be paying higher National Insurance contributions on their salaries or self-employment profits.
As the planned increase in dividend tax does not take effect until April 2022, it is possible to plan ahead. Clients with profits to extract may wish to take dividends before 6 April 2022 to take advantage of the current dividend tax rates. This may be particularly advantageous where the client has not used all of their basic rate band. Where an alphabet share structure is in place, dividends can be tailored to utilise the basic rate band and dividend allowances of family members who are also shareholders, providing other options for extracting profits prior to April 2022. If there are significant retained profits to extract and it is likely that the basic rate band will be used for the foreseeable future, again it may be worthwhile extracting profits prior to 6 April 2022 to save tax of 1.25%, even where the dividends are taxed at the higher dividend rates. This may be worthwhile if the funds are likely to be needed outside the company.
When planning ahead, clients should also be mindful of the corporation tax changes that will apply from 6 April 2023, increasing the rate of corporation tax payable where profits are more than £50,000. As dividends are paid from post-tax profits, a higher rate of corporation tax will reduce the profits available for distribution as dividends.