Where does the Mini-Budget meltdown leave owner-managed businesses?

Following his appointment as Chancellor last week, Jeremy Hunt has wasted no time in undoing almost all of the Mini-Budget tax measures that were announced by his predecessor only three weeks ago.

Many of the changes will have an impact for owner-managed businesses and will influence owner managers’ decisions regarding profit extraction versus reinvestment.

Key points applicable to owner-managers

Encompassing the announcements made following the Mini-Budget up to and including the Emergency Statement on October 17, the main headlines applicable to owner-managers are as follows:

• Additional (45%) rate of Income Tax to remain
• Corporation Tax will rise to 25% from 1 April 2023
• Basic rate of Income Tax to remain at 20% indefinitely
• 1.25% National Insurance increase scrapped (as announced in Mini-Budget)
• Cut to dividend tax rates will no longer apply

What does this mean?

Historically dividends have been a more tax efficient remuneration option than bonuses, particularly for those taxpayers with income in the higher and additional rate bands. However, the combined impact of the rate changes above means that the effective tax rates for dividends versus bonuses are expected to become broadly the same across each of the income tax bands, with effect from 6 April 2023.

Looking at the position for an additional-rate taxpayer (i.e. those with incomes over £150,000), for the current tax year (22/23) the overall effective tax rate on surplus profits extracted is 51% for dividends versus 55% for bonuses.  As illustrated below, this differential is removed with effect from 6 April 2023 when the overall effective rate becomes 55%, whether the surplus profit is extracted as a dividend or as a bonus.

There are, of course, other factors which should be taken into consideration as part of an owner-manager’s remuneration strategy.  For example, for companies making R&D claims, it may be beneficial for the owner-manager to take an increased salary in order to maximise the R&D tax credit claim and, in turn, reduce their overall effective tax rate.

Key takeaways

By removing any substantial differential between the effective tax rates for dividends and bonuses, it is perhaps the case that the Government wants to encourage owner-managers to leave value in their businesses and reinvest in their future operations.

It will be interesting to see whether there are any further significant changes to other taxes and investment-related reliefs when the Chancellor delivers his Medium-Term Fiscal Plan on 31 October. We will continue to keep an eye on developments and help our clients navigate their way through these challenging times.

Read more analysis in our mini-Budget hub.