Entrepreneurs and freelancers are being told to pay closer attention to how they pay themselves following the changes announced in the Autumn Statement, according to business finance expert, Lee Murphy. This call to action follows the chancellor slashing the threshold for dividends while freezing income tax levels for a further two years.
By Lee Murphy, managing director at The Accountancy Partnership
Following the Autumn Statement delivered by the Chancellor, small businesses now need stability to support them with planning for 2023 to stop unnecessary insolvencies. It is possible to soften the blow by changing the way that entrepreneurs pay themselves, using a mixture of salary and dividends.
The Autumn Statement will hopefully be the last in a long line of recent changes and U-turns, this year, allowing entrepreneurs to refocus their attention on growth and forecasting. Based on the changes, some entrepreneurs will need to alter their business finances to make sure they are giving themselves the best chance of survival and not paying more tax than they should.
The mix of salary and dividends will have to be reviewed each year as the dividend allowance is halved in the next two consecutive years.
Freezes to thresholds for income tax and national insurance for an extra two years, until April 2028, will mean more people are dragged into higher tax brackets. This includes self-employed people. But it is possible to soften the blow by changing the way that entrepreneurs pay themselves. Working out if income is better taken as a salary or dividends will make a noticeable difference to the pockets of millions of entrepreneurs.
The mix of salary and dividends will have to be reviewed each year as the dividend allowance is halved in the next two consecutive years. The most common way to pay yourself as a company director is by taking a salary up to the National Insurance threshold and taking any additional amount as a dividend.
Cuts to capital gains tax (CGT) mean it’s important for entrepreneurs to understand what ‘allowable expenses’ are and what you’re entitled to claim them for. Claiming expenses allows businesses to reduce the amount of tax they’ll have to pay. Business owners with investments that are paid in shares may want to reconsider. Shares, funds, and trusts can all be protected from CGT within the £20,000 annual ISA allowance, this remains untouched.
Energy price cap
Energy prices are one of the top concerns for business owners and the cost cap rising won’t do much to ease this stress. Entrepreneurs working from home are at least protected by the consumer cap until April before it increases by 20%. But those with commercial properties still face a cliff edge in April when the wholesale price cap ends.
The change to the energy price cap means a change to allowable expenses. Sole traders can claim utility costs as allowable expenses to minimise their tax bills, even on commercial premises or expenses. The expenses must be “wholly and exclusively for the purposes of the trade”, according to HMRC. If running a business from home, entrepreneurs can only claim a proportion of their bills as expenses. Making sure these types of expenses are included in tax returns is important.
The latest announcements won’t do much to change entrepreneurs’ options – the majority (83%) are worried about their current financial situation.
Business owners should review their plans and forecasts. Entrepreneurs should ask themselves if any unnecessary costs can be cut back or made more efficient.