from A newsletter for proactive planning... In this edition... Taxation of dividends in 2023/24 Family and personal companies – Optimal salary for 2023/24 Trivial benefits – Make use of the exemption Claiming relief for employment expenses Hybrid workers and relief for travel expenses April 2023 Issue www.compassaccountants.co.uk
PAGE 2 Taxation of dividends in 2023/24 If you have a personal or family company, taking dividends is a popular and tax-efficient way to extract profits. However, while they remain tax efficient, recent tax changes have eroded some of the advantages. What do you need to know when planning your dividend extraction strategy for 2023/24? Impact of corporation tax changes From 1 April 2023, changes are made to the way in which corporation tax is calculated. If your profits are more than £50,000, you will pay corporation tax at a higher rate than prior to that date, reducing the post-tax profits that you have available to pay as a dividend. Remember, dividends are paid from retained profits and you can only pay a dividend if you have sufficient retained profits from which to pay it. Even if your profits are unchanged, you may not be able to maintain previous dividend payments if your effective rate of corporation tax rises from 1 April 2023. Reduction in the dividend allowance All individuals, regardless of the rate at which they pay tax, are entitled to a dividend allowance. This was set at £2,000 for 2022/23 but is halved to £1,000 for 2023/24. It is to be further reduced to £500 for 2024/25. The dividend allowance operates as a zero-rate band. Dividends which are covered by the allowance are taxed at a zero rate, but the allowance uses up some of the tax band in which the dividends (taxed as the top slice of income) fall. The reduction in the dividend allowance will reduce the profits that can be extracted free of further tax. In a family company, an alphabet share structure is often used to facilitate the payment of dividends to family members whose dividend allowance would otherwise be wasted, increasing the profits that can be extracted tax-free. This strategy may need reviewing in light of the falling dividend allowance. Dividend tax rates Dividends are attractive as the dividend tax rates are lower than the income tax rates. However, it should be remembered that corporation tax has already been paid on the profits which are paid out as dividends. The dividend tax rates were increased by 1.25 percentage points from 6 April 2022 pending the introduction of the now-cancelled Health and Social Care Levy. Although the Health and Social Care Levy is not going ahead, the dividend tax rates are to remain at the increased levels for 2023/24. Consequently, dividends are taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band. Additional rate threshold The dividend additional rate will apply if dividends are paid in excess of the dividend allowance and taxable income exceeds the additional rate threshold. This is reduced to £125,140 for 2023/24 from £150,000 previously. Summary As a result of these changes, you may have less profits available from which to pay dividends. Where dividends are paid, only £1,000 will be tax-free. Above this level, dividends will continue to be taxed at the higher rates introduced from April 2022. Further, the additional rate will now bite where taxable income exceeds £125,140.
PAGE 3 Family and personal companies – Optimal salary for 2023/24 A popular profit extraction strategy is to pay a small salary and to extract further profits as dividends. Why pay a salary? There are a number of benefits of paying a small salary in order to take money out of a personal or family company for personal use. Reason 1 If a salary is paid at a level that is at least equal to the lower earnings limit for Class 1 National Insurance purposes – set at £6,396 for 2023/24 – the year will be a qualifying year for state pension and contributory benefit purposes. An individual needs 35 qualifying years to be eligible for the full single-tier state pension, and at least ten qualifying years to access a reduced state pension. Where the salary is at least equal to the lower earnings limit and does not exceed the primary threshold (set at £12,570 for 2023/24), the individual is treated as having paid Class 1 National Insurance contributions at a zero rate. This effectively gives them a qualifying year for free. If you do not currently have the requisite 35 years, it is worthwhile paying a small salary to secure an additional qualifying year. Reason 2 If your available personal allowance is at least equal to the salary that is paid, the salary can be paid tax-free. Extracting profits from the company without triggering a tax bill is worthwhile. Reason 3 Salary payments and any associated employer’s National Insurance are deductible in calculating the taxable profits for corporation tax purposes. This will save corporation tax at the prevailing rate, which from 1 April 2023 is between 19% and 25% depending on the level of your taxable profits. Reason 4 A salary can be paid regardless of the level of the company’s profits. Indeed, it is still possible to pay a salary even if doing so means that the company makes a loss. By contrast, dividends can only be paid if you have sufficient retained profits from which to pay them. Salary level The optimal salary level will depend on personal circumstances. However, as the standard personal allowance and the National Insurance primary threshold are now the same, if the personal allowance remains available, the position is more straightforward than in previous years. Where the standard personal allowance is available in full, the optimal salary is one equal to the personal allowance, set at £12,570 for 2023/24. At this level, there is no tax to pay and no primary Class 1 National Insurance contributions to pay either. CONTINUED ON PAGE 4
PAGE 4 There may, however, be some secondary (employer’s) National Insurance contributions to pay if the employment allowance is not available (as is the case for a personal company where the sole employee is also a director), or if it has been used up. Where this is the case, employer contributions are payable at the rate of 13.8% where the salary exceeds the secondary threshold, set at £9,100 for 2023/24. If a salary of £12,570 is paid, the secondary Class 1 National Insurance bill will be £478.86. However, as with the salary, employer National Insurance contributions are deductible for corporation tax purposes, meaning that paying a salary equal to the personal allowance is still worthwhile. If the employment allowance is available, as may be the case for a family company, there will be no secondary National Insurance to pay on a salary equal to the personal allowance. Once the personal allowance has been used up, it is better to extract further profits as dividends, which are taxed at a lower rate. Any additional salary will attract tax at 20% and employee’s Class 1 National Insurance of 12%, in addition to any employer’s National Insurance that may be due. This will outweigh any associated corporation tax savings. If the full personal allowance is not available, it is necessary to crunch the numbers as the optimal salary will depend on both individual circumstances and the rate at which the company pays corporation tax. Trivial benefits – Make use of the exemption Trivial benefits have their own tax exemption, which if used wisely can be used to treat employees. The exemption can also be used by personal and family companies as part of a tax-efficient profit extraction strategy. Nature of the exemption The exemption applies if all of the following conditions are met: 1.The cost of providing the benefit does not exceed £50. 2.The benefit is not cash or a cash voucher. 3.The employee is not contractually entitled to the benefit. 4.The benefit is not provided in recognition of particular services. Where the benefit is provided to a group of employees and it is impracticable to work out the cost of providing the benefit to each individual employee, the average cost can be used instead. To fall within the terms of the exemption, this should not exceed £50. The exemption can be used to give employees Christmas or birthday gifts or treats unrelated to their performance. There are, however, a number of traps to be wary of. Trap 1: Close company trap If the employer is a close company, the total value of tax-free trivial benefits that can be provided to a director or other office holder (or a member of their family or household) is capped at £300 a year. Otherwise there is no limit on the number of tax-free trivial benefits that can be provided in the tax year. CONTINUED ON PAGE 5
PAGE 5 Trap 2: Reward for services trap The exemption does not apply if the benefit is a reward for services. This means that it does not apply to a gift given to an employee for working later or for going above and beyond what is expected to deliver an excellent service to a client. This restriction also means that it cannot be used to shelter a taxi home when an employee works late and the journey is not covered by the separate exemption for late night taxis. In each case, the benefit is a reward for services and does not pass the trivial benefit test. Trap 3: Contractual entitlement trap The exemption does not apply if the employee has a contractual right to the benefit. This includes a right to expect it based on employer behaviour. Here, HMRC have previously used the (somewhat ridiculous) example of employees being given a cream cake every Friday to argue that their provision falls outside the trivial benefit exemption; employees have the expectation that they will receive a cake each Friday and as such the provision will fail the ‘no contractual entitlement’ test. While this may be an extreme example, it is probably wise to vary benefits provided under the terms of the exemption to avoid a potential challenge from HMRC. However, HMRC guidance instructs HMRC staff not to challenge a gift such as a birthday or Christmas gift simply because it is provided every year. They also accept that the provision of free tea and coffee is within the exemption. Trap 4: The gift card trap The trivial benefit exemption only applies if the cost of the benefit does not exceed £50. Caution needs to be exercised if the benefit is provided via an app or the employee is given a gift card, which is topped up periodically. Here the cost is the total cost for the tax year, rather than that each time the app or gift card is used, and where this exceeds £50 for the tax year, the exemption will not apply. For example, if an employee is given access to an app that allows them to order a free bunch of flowers costing £30 each month, the exemption will not apply despite the fact that each bunch of flowers costs less than £50 as the cost of using the app is £360 for the tax year. The trap applies in a similar way if the employee is given a season ticket for sporting or cultural events. Proceed with caution Used wisely, the trivial benefits exemption can be a tax-efficient way to treat employees and engender goodwill. However, care must be taken not to fall foul of the traps. If the exemption does not apply, it may be possible for the employer to use a PAYE Settlement Agreement to settle the tax bill on the employee’s behalf.
PAGE 6 Claiming relief for employment expenses If you incur expenses in doing your job, you may be able to claim tax relief. While the rules governing the availability of relief are strict, the process for claiming relief where it is available is relatively straightforward. Availability of tax relief Expenses that may qualify for tax relief include travel expenses incurred in relation to business travel, mileage allowances if you use your own car for business journeys, the cost of professional fees or subscriptions and the additional costs of working at home. However, it should be noted that the rules are strict and where a deduction is not granted by a specific provision, the general rule only permits a deduction for expenses incurred wholly, exclusively and necessarily in the performance of the duties of your employment. The total shown on the summary page will be used to work out the tax relief to which you are entitled. The online service is available on the Gov.uk website at www.gov.uk/guidance/claim-income-tax-relief-for-youremployment-expenses-p87. Route 2: Postal claim You must make a claim by post if you are claiming on behalf of someone else or you are claiming relief for expenses for more than five jobs. Postal claims are only accepted on form P87, which is available to download on the Gov.uk website at www.gov.uk/government/publications/claimincome-tax-relief-for-your-employment-expenses-by-post. It should be noted that the following information is mandatory, and the form will be rejected if it is not included: ·all section 1 information with the exception of title and Claiming relief contact phone number; If you are eligible to claim tax relief for employment ·the employer’s PAYE reference in section 2; and expenses, there are various ways in which this can be done. ·the type of industry in respect of which expenses are being claimed in section 2. Route 1: Claim online You may be able to claim online. Route 3: Telephone claims Before making a claim, you can check whether you can use A claim can be made by phone (0300 200 3300) if a claim the online service by using the tool which can be found at has been made in previous years for the same expense type www.tax.service.gov.uk/claim-tax-relief-expenses. You and your total expenses are either less than £1,000 or less cannot make a claim online if: than £2,500 for professional fees and subscriptions. ·you are making the claim on behalf of someone else; Claims cannot be made by phone for expenses incurred as a ·you complete a self-assessment tax return; result of working from home. ·you are claiming tax relief for expenses of more than £2,500; or Route 4: Self-assessment tax return ·you are making a claim for more than five different jobs. If you complete a self-assessment tax return, you should If you are eligible to use the online claim service, you will claim relief for employment expenses in the employment need to include all the expenses that you want to claim for pages of your tax return. the relevant tax year.
PAGE 7 Hybrid workers and relief for travel expenses The pandemic changed the way in which many people worked, forcing them to work from home if they could. Post-pandemic, many employees have continued to work from home some or all of the time. Under hybrid working arrangements, an employee will work from home some of the time and from the employer’s premises some of the time. As a general rule, tax relief is not available for the cost of travel from home to work. Consequently, where an employee has hybrid working arrangements, HMRC will only allow tax relief for travel between the employee’s home and the employer’s premises if they accept that the employee’s home is a workplace. Home as a workplace The tests that need to be met for HMRC to accept an employee’s home is a workplace are strict and outdated and do not reflect the current reality. For HMRC to accept that an employee’s home is a workplace, all of the following conditions must be met: 1.The duties that the employee performs at home are substantive duties of the employment. These are duties that the employee has to carry out and which represent all or part of the central duties of the employment. 2.The duties cannot be performed without the use of appropriate facilities. 3.No such appropriate facilities are available to the employee on the employer’s premises (or the nature of the job requires the employee to live so far from the employer’s premises that it is unreasonable to expect them to travel to those premises on a daily basis). 4.At no time, either before or after the employment contract is drawn, is the employee able to choose between working at the employer’s premises or elsewhere. The reality of modern working is that many employees can work anywhere as long as they have a laptop and an internet connection. While in the past, the nature of the duties may have dictated where they could be carried out, for many employments this is no longer the case. The travel expenses rules have yet to catch up with this and the conditions that need to be met for home to be regarded as a workplace mean that in practice it is difficult for hybrid workers to secure tax relief for the costs of travel between their home and their employer’s premises. Flexibility v tax relief Hybrid working is attractive because of the flexibility that it offers, but it is this flexibility that can jeopardise the availability of tax relief for the costs of travel between the employee’s home and the employer’s premises (and render any reimbursement of these costs by the employer taxable). As is often the case, there is a compromise to be had by adopting a more structured arrangement under which the employee works at home on set days and at the employer’s premises on other days, rather than being able to choose each day whether to work at home or in the office. For example, if an employee works at home on Tuesday, Wednesday and Friday but in the office on Monday and Thursday, as long as it is not possible to work in the office on a homeworking day, tax relief should be forthcoming if the employee has to travel to the office on one of those days – the travel would be travel between two workplaces rather than home to work travel. However, no relief would be available for travel to the office on the office-based days.
PAGE 8 TAX DIARY APRIL 2023 1 April 2023 – Due date for Corporation Tax due for the year ended 30 June 2022. 19 April 2023 – PAYE and NIC deductions due for month ended 5 April 2023. (If you pay your tax electronically the due date is 22 April 2023). 19 April 2023 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2023. 19 April 2023 – CIS tax deducted for the month ended 5 April 2023 is payable by today. 30 April 2023 – 2021-22 tax returns filed after this date will be subject to an additional £10 per day late filing penalty for a maximum of 90 days. For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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