(2 Minute Read)
Why you could be left with a 54.5% tax bill?
What is it?
In the Chancellor’s 2021 budget, Rishi Sunak announced a series of planned tax rises.
The increase in corporation tax has resulted in an increased marginal rate for profits over £50,000.
Depending on how your income is configured, you may be stung twice by marginal tax rates.
How does it add up?
For profits of £50,000 or below the corporation tax rate will remain 19%. For profits above £250,000 the tax rate will be 25%.
For profits between £50,000 and £250,000 the tax rate is scaled until you reach the 25% rate.
In order to do this, the profits between £50,000 and £250,000 are taxed at 26.5%.
On top of this, the additional tax rate for dividends is 38.1%.
This means that £1,000 taxed at the marginal corporation tax rate of 26.5% would be £735, and if this was then taken out as dividends at the 38.1% tax rate it would leave £455 in your pocket.
That means that out of the £1,000 you would pay £545 in tax, or a 54.5% tax rate.
What does this mean for you?
Depending of how you take your income and how much profit your company makes, this may have no impact on you. If it does, then you still have two years to plan for this situation.
It may be that you wish to take advantage of the low capital gains tax rates by selling or liquidating your company.
Or it could be time to re-evaluate how you draw income from your company as there may be more tax efficient alternatives to the dividends, for example using the tax relief on pension contributions, or making sure everyone’s lower tax bands are fully utilised.
Kind regards Ilyas