For the past few years, the personal tax rates have remained the same, meaning that it made no difference whether you extracted funds from your business in one tax year or the next. However, as of the 6th of April 2022, this will no longer be the case. The tax payable on dividends and the national insurance contributions (NIC) on your salary will both rise by 1.25 percentage points. Although these will increase, the basic rate band (where income tax is charged at the lowest rate) has been frozen at £50,270 until the 6th of April 2026.
How To Take Advantage Of The Lower Rates
With the above in mind, if you are planning to take cash out of your business, it is recommended to take advantage of the lower rates before the 6th of April 2022 cut off date. Currently, you can extract £2,000 of dividends and £9,568 of salary, both free of tax and NIC, in 2021-22.
While further salary and bonuses up to £12,570 are tax-free, they will still carry NIC at 12% (13.25% from April 2022). If your dividends above £2,000 fall within your basic rate band, they will be taxed at 7.5% and will then rise to 8.75% on the 6th of April 2022. Dividends in the higher rate band, on the other hand, will increase from a 32.5% tax percentage to 33.75%.
If you are planning significant expenditure in 2022, the best route may be to extract the funds you need before April 2022, providing that this will not push you to a higher tax band.
As always, our professional team can help you work out the most tax-efficient ways to extract money from your company, so please contact us to arrange a meeting.