Nowadays the tax advisors are focusing on the effective tax rate their clients will have to face on the amounts they take out of the business. Since they own the business, the overall tax burden is relevant because what is left in the business is also theirs, meaning that corporate tax and state employer insurance that the business pay must be factored in with the income of the citizens. VAT insurance is paid by the person.
Now there is a new consideration: the rate of health and well-being suffered by both the business and the individual. The latest introduction of the 1.25% health and social insurance rate by the Chancellor increased the dividend tax rate by 1.25 percentage points and employee and employer insurance contributions in the same amount.
However, the central questions are: does this change existing compensation strategies, and what needs to be considered in the conversation? What are the possible changes in the future? The current situation is that for the financial year 2021-22 if the profit or the salary is generated by the company, the effective tax rate is as follows:
Rate | For Dividend | For Salary |
Basic | 25.08% | 40.25% |
Higher | 45.33% | 49.03% |
Additional | 49.86% | 53.43% |
As it can be seen from the above, the effective tax rate on dividends is slightly cheaper, so most owners' executives have long been paid little for the use of their quota is deducted as dividends. These rates are being revised upwards in the financial year 2022 - 2023 from 1.01% to 1.73%.
Other factors influence these decisions because the business must have distributable reserves to allow dividend payments, and whether the business is relatively small in its life cycle or if the owner needs regular dividends for the purpose of dividends. Personal credit, salary may be the best option. A dividend option with recognition of a small tax differential.
The gap between dividends and wages has continued to widen, and it appears that future compensation strategies will continue to use dividends if practical considerations are followed.
What are the Alternatives
However, as effective tax rates continue to rise, many entrepreneurs may seek alternatives. Currently, companies can contribute to the private pension plans of entrepreneurs without subscribing to social security and without levying corporation tax.
Although there are restrictions on the amounts payable, this is an obvious alternative to the proven dividend method, which would allow profits to be skimmed with a lower effective tax burden, while recognizing that such funds are unlikely to be achieved by the contractor. Can use it for several years.
With the announcement of a rise in corporate tax rates from 2023, effective corporate tax rates for taxpayers will reach an alarming rate of 54.51%, down from just 40% six years ago, causing many entrepreneurs to question the conservative mantra of a low-tax party. in this country.