Profit Extraction: Spring Budget 2021

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.