If you own a small business and are also a shareholder director, you may be wondering whether to take a salary or dividends.

When it comes to paying yourself, there are both advantages and disadvantages to each option, including potential tax savings.

We’ll explore how taking salaries versus dividends for shareholder directors of small businesses in the UK may affect the money you take home.

How should you remunerate directors?

The UK tax system allows company shareholders to draw money from their companies in two ways – either by taking a salary via PAYE, which will be subject to Income Tax and National Insurance Contributions or by taking dividends, which is instead subject to a unique dividend tax rate and free of NICs.

Why you should still take a salary

There are two primary reasons, beyond the earnings, for drawing at least part of your remuneration from a salary from your business.

First and foremost, you will more than likely want to continue to accrue qualifying years towards your state pension.

To obtain the necessary National Insurance credits to receive this benefit your salary will need to be in excess of the current Lower Earnings Limit (£6,396 in the 2022/23 tax year).

When setting your salary, many directors choose a level between the Lower Earnings Limit and the Primary Threshold (£11,908 per annum for directors), as this will ensure you receive National Insurance credits, but will avoid having to make regular National Insurance Contributions.

Secondly, taking a salary counts as an allowable business expense, which can be offset against your profits to reduce the amount of Corporation Tax your company is liable for.

How should you set a salary?

If you are planning on drawing money from your business but intend on maintaining contributions towards state pensions and other benefits such as maternity leave and job seekers’ allowance down the line, then it makes sense for you to take salary instead of dividends.

You will also need to consider how your salary affects your income tax position. Every UK taxpayer enjoys a personal tax allowance of £12,570 per annum (frozen until 2028).

Any earnings above this amount, including income from a salary, will be taxed at your marginal rate (basic, higher and additional).

If your salary exceeds the thresholds for these tax bands you will face a higher rate of tax, but this will also need to be considered alongside other earnings outside your salary, which could carry you over into higher rates of tax as well.

This will be particularly precarious from this April when the threshold for the additional rate of income tax (45 per cent) falls from £150,000 to £125,140.

Why take dividends instead of a salary?

Dividends, unlike salary payments, do not attract National Insurance Contributions and the tax rates on dividends are lower than tax rates on salaries.

However, care must be given to ensure dividends are correctly voted on by all shareholders and the company has sufficient distributable reserves available.

However, if your annual dividend payments exceed £2,000 per year (based on the current dividend allowance), then you will need to pay some tax on those payments.

This dividend tax allowance will be reduced from April 2023 to £1,000 and halved again to just £500 in the following tax year, but dividend tax rates remain lower than the rates of income tax and, therefore, may offer a tax advantage to some directors.

For 2022/23 and into the new tax year, the dividend tax rates are:

• Basic rate: 8.75 per cent
• Higher rate: 33.75 per cent
• Additional rate: 39.35 per cent

How to balance dividends and salary

It’s important to consider both options carefully before deciding which one works best for you based on your current financial situation and future plans.

Usually, directors will choose a combination of both dividends and salary so as to manage their tax position and that of their company, without reducing their access to benefits, such as a state pension.

This is something that needs to be done regularly at tax rates and allowances change. In the year ahead there are several changes to these rates and allowances that we have outlined.

It’s important to weigh all these factors carefully before deciding on a remuneration approach for you and any other directors of the business. This is where seeking regular professional advice can be particularly beneficial, especially as your circumstances may change from one year to the next.

Keeping on top of your business’s financial health is critical to its success. A great place to start is by understanding what a balance sheet is and what it can tell you about the health of your business. Let’s look at what a balance sheet is, why it’s important, and how you can improve yours.

What is a balance sheet?

A balance sheet is an important financial document that provides an overall view of the financial position of your business. It shows how much money you have in assets (e.g., cash, accounts receivable) and liabilities (e.g., loans, accounts payable). When these two sides are balanced (i.e., when assets equal liabilities), the balance sheet reveals whether or not your business is operating at a profit or loss.

Why is it important?

Your business’s balance sheet tells you if you have enough money to pay for current expenses and future projects or investments. This information helps you make decisions about where to invest capital and whether or not to take on additional debt to finance growth opportunities.  The more informed decisions you make, the better off your business will be in the long run!

How can I improve my balance sheet?

The first step in improving your balance sheet is understanding exactly where your money is going each month – which means tracking all income sources and expenses with accuracy and consistency.

Additionally, it’s important to make sure that any debt on the books is managed responsibly; this means making timely payments so that you don’t accrue late fees or interest charges which can hurt your bottom line in the long run.

Finally, consider investing in new technology or resources that can help streamline processes within your business. This will allow for faster transactions which can help increase efficiency and save money over time.

Understanding and improving your business’s balance sheet are critical steps toward achieving financial success.

By tracking income sources and expenses accurately, managing debt responsibly, and investing in new technology or resources, small businesses in the UK can ensure they remain solvent while also creating an environment for growth opportunities down the road.

A major overhaul of VAT penalties came into effect on 1 January 2023. This new approach changes how penalties are applied, as well as how interest is calculated and paid. In this article, we’ll break down what you need to know about the changes.

What is changing?

The biggest change that businesses can expect is a replacement of default surcharges with new penalties for late submissions and late payments. The objective of this shift is to reward businesses that comply with their VAT obligations on a timely basis. Additionally, the calculation of VAT interest has changed, including how it is calculated and paid.

Who is affected?

All businesses submitting VAT returns starting on or after 1 January 2023 are affected by these changes. It’s important for companies to note that these changes may also affect their tax planning strategy and potential savings from earlier payment dates.

How do the new penalties work?

HM Revenue & Customs (HMRC) has outlined a points-based system for late submission penalties intended to incentivise businesses to comply with their reporting obligations:

Up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

31 days or more overdue

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 plus 2 per cent on the VAT you owe at day 30.

You will receive a second penalty calculated at a daily rate of 4 per cent per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

The frequency-dependent thresholds for penalty points mean that more frequent non-compliance results in higher penalties. However, should a business meet its obligations within the given timeframe, all penalty points are reset back to zero and no further action will be taken against it.

Businesses should also take note of the benefits associated with paying sooner rather than later when it comes to VAT. Paying early means fewer late payment fees, as well as interest due on top of those fees if they are not paid within 30 days of filing a return or making an adjustment request after filing one’s return.

For those who do pay late but still manage to file their returns before the deadline, there are still ways they can reduce their overall financial burden by paying off any outstanding taxes before incurring additional costs in interest charges or late payment fees.

With the new year upon us already, businesses need to be aware of the possible consequences of late returns and payments.

The exemption for paying Capital Gains Tax (CGT) is changing.

The CGT annual exemption will fall from £12,300 to £6,000 from April 2023, before being cut in half again to £3,000 from April 2024.

CGT is what you pay on any gains that you make when you come to sell an asset, such as a second home or shares.

However, the annual CGT exemption allows you to make a certain value of gains before you pay tax on any additional gains.

Higher-rate or additional-rate taxpayers pay 28 per cent on gains from residential property and 20 per cent on gains from other chargeable assets.

If you are a basic-rate taxpayer, you will be charged 18 per cent on residential property and 10 per cent on other gains.

Steps that could reduce your CGT liabilities include:

• Ensuring you use your allowance for the current year as soon as possible.
• If you are married or in a civil partnership, you can utilise your partner’s unused allowance. You can transfer your assets into joint names if you are married or in a civil partnership without triggering a tax event. This doubles your £12,300 allowance to £24,600 in one year.
• Utilise tax-efficient investments such as the Enterprise Investment Scheme and Venture Capital Trusts.
• Using Business Asset Disposal Relief when selling a business.

Now is a great time for investors to review their portfolios and decide whether they should transfer or dispose of certain assets before these changes take place.

If you want to take advantage of the current CGT tax rate it is best to seek advice from a qualified tax adviser.

Companies House has gone fully digital after the announcement of the closure of its office in London and all filing being transferred online.

It has also permanently shut the public counters in Cardiff, Belfast and Edinburgh.

Online services will be available 24 hours a day, seven days a week.

Changes have taken place with improved security features, which include:

• Multi-factor authentication
• The ability to link your company to your WebFiling account to give you more control over your filings
• Being able to digitally authorise people to file on your behalf on WebFiling, and to remove authorisation
• To view who’s digitally authorised to file for your company
• An option to sign up for emails to help you with the running of your company

WebFiling is an online service that Companies House provides, designed to make the submission of official paperwork easier and paper-free.

Once you’ve linked your company to your account, you will not need to enter your authentication code every time you file online.

Key changes, which form part of the 2020 to 2025 strategy and part two of the Economic Crime Bill, are expected to go through Parliament this spring and will include:

• Filing deadlines will not be shortened at the moment, but legislation will be introduced to facilitate future changes.
• Small companies will no longer have the option to prepare and file abridged accounts and will be required to file both their profit and loss account and directors’ report.
• Micro-entities will also be required to file their profit and loss accounts but will continue to have the option to not prepare or file a directors’ report.
• Dormant companies will be required to file an eligibility statement.
• All companies will be required to file accounts digitally, with full tagging.

Chancellor Jeremy Hunt has announced a series of changes to the UK research and development (R&D) tax credit regime, including a cut to the deduction and credit rates for the SME scheme.

The R&D SME scheme enhanced deduction rate will be cut to 86 per cent from the current 130 per cent, and the payable tax credit rate cut to 10 per cent from 14.5 per cent.

However, the rate of the separate R&D expenditure credit – also known as RDEC – will increase significantly, from 13 per cent to 20 per cent.

The changes to the SME scheme mean that if you are a loss-making company, you will now only receive £18.60 for every £100 spent from April next year, compared to £33.35 per £100.

These changes are intended to reduce abuse in the R&D tax system, particularly claims for SMEs, which have been the spotlight of several investigations by HM Revenue & Customs (HMRC).

They are scheduled to take effect from 6 April 2023, so there is still time to plan, and it may make sense to bring forward R&D expenditure, where possible, to benefit from more favourable deductions and credits.

Planning for the future is essential when running a business and, ideally, you should have a perspective of where you want to be in three to five years.

Goals or targets provide a sense of direction, focus, and motivation. But how do you set aims effectively?

You could try the SMART method. This relies on five key criteria – Specific, Measurable, Achievable, Realistic, and Time-Based – which allow you to create a clear target for success.

What is the plan to get you there?

It may be that small steps are needed before achieving the ultimate goals and could include:

• Establishing your USP. What can you offer that the competition cannot?
• Identifying your ideal customer, do you need to pivot the business to attract new clients?
• Maximising talent. Your staff are your most important asset.

How you can build SMART goals into your business plan:

Specific

A specific goal clearly defines what needs to be achieved, by whom, where and when it is to be achieved (and sometimes why).

Measurable

Measuring draws your focus, and the latest tracking software can measure this accurately.

When you measure, you need to ask certain questions:

• How much?
• How often?
• How many?

Achievable

When you set goals, ensure they’re achievable. It’s a mistake to set unreachable goals because you’re setting yourself up for failure from the beginning.

Realistic

Make sure the goal that you set has long-term importance in what you want to achieve as an individual or an organisation.

Time-based

It sounds obvious but set up a timeframe. A deadline can be an excellent motivator.

Struggle to set goals? Need help monitoring your KPIs? It makes the most sense to seek professional support so you can create a SMARTer approach to working.

Millions of new taxpayers will be created by the extended freeze on the income tax thresholds.

In the Autumn Statement, the Government froze the thresholds until 2028 – two additional years on its original plans.

The income tax thresholds for basic (20 per cent) and higher rate (40 per cent) taxpayers will remain unchanged, while the £12,570 personal allowance, the amount you can earn before you start to pay tax will also remain the same.

In addition, for those paying the additional rate of 45 per cent, the threshold has been reduced from £150,000 to £125,140 from 6 April 2023.

In what has been described as a stealth tax, the freeze is likely to lead to many taxpayers being fiscally dragged into higher tax bands by inflation, and with it many individuals’ wages and income.

There are many tax-efficient ways of mitigating what you pay in tax, including:

Pension top up

You can reduce your income tax by topping up your pension using your annual tax-free allowance. Personal pension contributions within the annual £40,000 pension allowance lower your ‘adjusted net income’, which HMRC uses to calculate your tax bill.

ISA allowances

ISAs are a tax-efficient way of saving. You don’t pay income tax or Capital Gains Tax (CGT) on investments inside an ISA, and you can withdraw money whenever you like, tax-free. You can currently invest up to £20,000 in ISAs.

Double your tax allowance

If you’re married or in a civil partnership, your tax allowances can, in some cases, be combined to increase your household’s income tax allowance. For example, the Marriage Allowance lets you transfer £1,260 of your Personal Allowance to your husband, wife or civil partner if they haven’t used it.

If you are unsure of the tax-saving opportunities available to you, you should seek professional advice.

The message from the Chancellor, Jeremy Hunt, in the days before he rose to the despatch box in the House of Commons to deliver the Autumn Statement was clear; he would be outlining billions of pounds of tax rises and spending cuts.

These spending cuts and tax rises, he said, would affect everybody and were necessary to re-establish the markets’ trust in the future health of the public finances.

What was less clear was exactly who the announcements would affect the most and how they would be impacted.

Of course, the challenges for the Chancellor extended well beyond winning the trust of the markets in relation to his stewardship of the public finances. He will also have been thinking about inflation, the cost-of-living crisis, interest rates and promoting economic growth, not to mention the political optics.

These are competing but intricately related pressures; action to address the cost of living carries with it the risk of further inflation; action to reassure the markets brings the twin dangers of not addressing the cost-of-living crisis or promoting economic growth. Different economic considerations do not exist in a vacuum.

Further underscoring the scale of the challenge, just a day earlier, the Office for National Statistics announced that inflation had reached a 41-year high of 11.1 per cent.

This followed warnings from the Bank of England’s Monetary Policy Committee, as it increased interest rates to three per cent in early November, that the UK faces a “prolonged” recession.

The only real questions concerned the detail of what the Chancellor would do. Which taxes would be affected? Will they rise now or in the future? Would tax rates rise? Would the focus be on freezing thresholds? How much pain would there be? Who would bear the brunt?

And, most importantly, would it work?

• Public finances
• Personal tax
• Business tax
• National Living Wage, Energy and Pensions
• Conclusion

Public finances

Addressing the Office for Budget Responsibility’s (OBR) economic forecasts, the Chancellor said that the economy is now in recession and is expected to shrink by 1.4 per cent in 2023/24 before growing in 2024/25.

Meanwhile, he said unemployment is expected to rise to 4.9 per cent in 2024, up from 3.6 per cent now, before falling to 4.1 per cent the next year.

Borrowing this year stands at 7.1 per cent of GDP, according to the OBR. Debt as a percentage of GDP is expected to peak at 97.6 per cent in 2025/26 before falling to 97.3 per cent in 2027/28.

Personal tax

Beginning with personal tax, the Chancellor said that National Insurance, Inheritance Tax and Income Tax thresholds and Allowances will be frozen at their current levels for a further two years to 2028.

He said the Dividend Tax Allowance will fall from its current level of £2,000 to £1,000 in 2023/24 and then to £500 in 2024/25.

Turning to Capital Gains Tax, the Chancellor said the current Annual Exempt Amount will fall from £12,300 to £6,000 in 2023/24 and then to £3,000 in 2024/25.

He then turned his sights to electric vehicles, saying that a road tax will apply to them from 2025.

Business Tax

Turning to business taxes, the Chancellor said he would reduce the enhanced deduction rate for Research & Development (R&D) Tax Relief for SMEs from 130 per cent to 86 per cent of qualifying expenditure from April 2023. The tax credit for loss-making SMEs will fall from 14.5 per cent to 10 per cent.

On Business Rates, he said that the revaluation exercise will go ahead as planned in April 2023. £13.6 billion of support will be provided over five years to help businesses transition to the new bills.

He said the Business Rates multipliers will be frozen in 2023/24 and there will be extended and increased relief for businesses in the retail, hospitality and leisure sectors. That relief will increase to 75 per cent.

The National Insurance Secondary Threshold will remain at £9,100 until April 2028.

National Living Wage, Energy and Pensions

Turning to the National Living Wage (NLW) and National Minimum Wage (NMW), the Chancellor announced he would increase the rates for those aged 23 and over by 9.7 per cent to £10.42 an hour from 1 April 2023.

Meanwhile, the rate of NMW for those aged 21 and 22, 18 to 20, and 16 and 17 will rise to £10.18, £7.49, and £5.28 an hour respectively. The apprentice rate will also rise to £5.28 an hour.

Moving to address energy costs, the Chancellor said the current Energy Price Guarantee (EPG) will remain in place until April 2023, limiting typical energy bills to £2,500 per year. From April 2023, the EPG will rise to £3,000 for the typical household.

Concluding his speech with pensions, the Chancellor said that the State Pension Triple Lock will remain in place, meaning the State Pension will rise in April 2023 in line with September 2022’s rate of CPI – 10.1 per cent.

Conclusion

The economy is a complex and dynamic system, and there are limits to what can be known about how it will respond to any particular intervention – it is the sum of the ever-changing actions of millions of individuals.

What is more, the Chancellor only has his hands on some of the levers of economic influence, not all of them, and moving one of the levers he controls can stop him from moving another.

Mr Hunt will be hoping he has pulled the right levers by the right amount and that the factors out of his control move in the direction he wants them to.

For businesses and business owners, the impact of the changes is likely to vary considerably and a renewed focus on tax planning is likely to be needed.

Link: Autumn Statement 2022