Dividend and NI tax rises: is an SPV still the right choice for property investment?

In this blog, our Head of Tax, Nadeem Raziq, breaks down exactly what the new tax changes will mean for company directors and looks at whether an SPV is still the right choice for investing in property.

To summarise, these are the tax increases company directors are facing:

• 1.25% increase on dividends from 6 April 2022

• Employer and employee National Insurance 1.25% increase from 6 April 2022

• Corporation Tax will increase up to 25% from April 2023

• Personal allowances frozen at £12,570 from 2021 to 5 April 2026

Corporation tax

Corporation tax is currently 19%, however this is set to increase by 6% in 2023 to 25%.

• The myth - Many headlines suggest that all companies will be taxed 25% from April 2023. This is not the case.

• The reality - The 19% rate will remain as a “small profits rate” for companies with profits of £50k or less. This equates to 70% of companies.

Additionally, the new rate will be tapered on profits above £50k. This means that only businesses with profits over £250k will be taxed the full 25%, which is around 10% of companies.

Tax on dividends

Taxes on dividends will increase by 1.25 percentage points from 6 April 2022.

This means that after the £2,000 tax-free allowance, the current dividend rate will increase as follows:

• Basic rate taxpayers - 7.5% to 8.75%

• Higher rate taxpayers - 32.5% to 33.75%

• Additional rate taxpayers - 38.1% to 39.35%

If you're planning to buy more properties, keeping cash in your SPV can be a tax efficient way to save up as you only pay taxes on dividends when you take profit out of your company.

National Insurance

Employee’s and Employer’s National Insurance contributions will increase by 1.25% from 6 April 2022 to 5 April 2023

• From 6 April 2023, a health and social care levy charge of 1.25% will be chargeable to both employed and self-employed individuals.

• Downing Street says a typical basic rate taxpayer earning £24,100 would contribute annually £180, while a higher rate taxpayer on £67,100 would pay £715 per year.

• If you employ staff or family members through your property company, this will mean the company's National Insurance bill for both employer and employee will increase from 6 April 2022, and the benefits of remunerating yourself above the NI threshold will start to diminish.

Considering these tax rises, is an SPV or limited company still beneficial for property investors?

“Of course the tax rises for both employer and employee are not ideal when thinking about using an SPV limited company to build a property portfolio. However, with income tax rates still being a considerable level away from corporation tax rates, and with the freezing of the tax free personal allowance for the short term, a limited company is still one of the most tax efficient vehicles for property investors. In reality, we don't expect the majority of investors to be impacted by a sudden increase in corporation tax rates which come into force on 1 April 2023 due to the taper that is in place.

“With mortgage interest restrictions (s24) now fully in operation since 6 April 2020, property investors' taxable profits have increased in their personal capacity. This may lead to a significant increase in tax due, depending on your tax bracket. For instance, higher taxable profits may push a basic rate taxpayer (20%) into a higher rate (40%). As such, the use of a limited company to build a portfolio is still a strong alternative. More care needs to be taken now in terms of profit extraction as well as who you elect as shareholders of the business to ensure you can withdraw money more efficiently from your business.”

What can you do to mitigate these tax increases?

Be proactive in your tax planning for extracting profits from your company

• Look at the structure of your company: adding a family member, shareholders, ABC shares etc.

Make sure your ISA and pensions are tax efficient

• Look at investing or increasing the amounts you contribute to certain pension schemes: SIPP, SSAS etc.

Change business tactics and reinvest profits in the company rather than paying yourself

• For instance, keeping money within your company to fund your next property purchase.

We're Provestor, an award-winning accountancy firm that specialises in supporting landlords and property investors.