The time for remuneration planning is now

Engaging early with clients on what their expenditure requirements are and how to meet them avoids incurring the cost of standing still.

In January our clients’ credit card bills and our own will hit the doormats – a timely reminder of just how expensive the festive period was, and the impact of inflation.

January is also the time to close the book on income tax reporting (bar the odd straggler) and focus on the conversation with clients on remuneration planning for this and perhaps the next tax year.

Many of us will have watched the revolving doors at numbers 10 and 11 Downing Street with abject despair, along with the back and forth on tax legislation.

However, as the paint has dried in Downing Street, at least for now, we can at least plan with some clarity, albeit with a backdrop of global economic uncertainty in 2023.

Tax creep

You would have had to have switched off all news feeds over the past month to be unaware of the public sector anxiety over pay offers, relative to trending inflation. However, it is possible that your business owner clients have not grasped the headwinds of tax rises facing them from April 2023.

There is much discussion about the freezing of personal allowances and how many will be dragged into the 40% income tax band, or simply “inflated” into it, but little comment in the broadsheets about corporation tax hikes.

Imagine a simple business where three friends work together. In 2022/23 they asked you to keep them below the £100k income mark each, so they could keep their personal allowances intact.

Overheads are up

What does the planning conversation look like for 2023/4? Not only have their personal overheads gone up, like the rest of the UK, but their business will be subject to a marginal corporation tax rate of 26.5% from £50,000 to £250,000, while their personal tax-free dividend allowance reduces from £2,000 to £1,000.

Overall, if you crunch the numbers, your clients will be some 6% worse off because of these tax changes, before even considering the impact of inflation.

If those same clients are adamant about the amount of money they need to draw from the business then what is the impact on the profit the business needs to make before corporation tax? Or, the turnover required to hit those remuneration needs?

Multiplier effect

The multiplier effect is really quite scary. The increase in turnover for a business making a 20% net profit margin, before corporation tax to keep three directors on the same net income for 23/24, as this tax year is over £100,000. If your clients are already additional rate taxpayers, you might find that an extra £200,000 of turnover is required to deliver a constant net income for the same aspirational three shareholders.

These are not just passing conversations to have with clients, but significant ones.

Engage early

The changes to corporation tax are a big reason to engage early with clients on what their expenditure requirements are and how to meet them.

It may be a contentious point, but given all that is going on with higher mortgage rates, double-digit inflation and the significant impact of corporation tax changes, there ought to be a sigh of relief that time is now freed up to engage with clients on how best to fund their personal cashflow needs.

The tip is to start it early and not leave it till the end of March!

Visit www.allin.place for a demo and insight into how we can help support your remuneration planning exercises.