Upcoming Tax Changes for Buy to Let Landlords

Being tax-efficient is an essential way of maximising net rental yields. What are the changes coming in over the next two years? And how will upcoming changes to dividend tax and corporation tax impact buy to let landlords?

Before we dive in, the table below details the existing and future tax rates for income tax, National Insurance, Corporation Tax and Dividend Tax.

Tax

2021/22

2022/23

2023/24

Income tax rates (higher rate taxpayer)

40%

40%

40%

National Insurance – employee

12% / 2%

13.25% / 3.25%

12% / 2%

National Insurance – employer

13.8%

15.05%

13.8%

Health & Social Care Levy - employee

 

 

1.25%

Health & Social Care Levy - employer

 

 

1.25%

Corporation tax – flat rate

19%

19%

 

Corporation tax on first £50,000

 

 

19%

Corporation tax on next £200,000

 

 

26.5%

Corporation tax on profits > £250,000

 

 

25%

Dividend tax rate (higher rate tax payers)

32.5%

33.75%

33.75%

So, in summary:

  1. No change to income tax on salary in the period
  2. An increase next year of 1.25% on the National Insurance (NI) burden for employers and the NI paid by employees. This (technically) falls away in 2023/24, but is replaced by a new tax of identical amount in 2023/24 called the “Health & Social Care Levy”
  3. An increase in Corporation Tax in 2023/24 for all companies with profits > £50,000
  4. An increase of 1.25% on the dividend tax (on all bands).

Overview of tax for landlords

The removal of mortgage interest tax relief for individual landlords has encouraged many landlords to undertake their buy to let investment activities through limited companies. This will continue to be the dominant factor in determining the most tax-efficient model for investment for most landlords.  However, the upcoming tax changes will complicate matters for many landlords, so, in addition to describing the changes in tax, we have set out below a summary of how the taxes interact in three scenarios:

  • Individual investors
  • Limited company investors – extracting profit through dividend
  • Limited company investors – extracting profit through increased salary

Dividend Tax

As part of the Government’s plan to raise additional funds for the NHS and social care, dividend tax rates will increase by 1.25% from 6th April 2022.

What is a dividend?
Dividends are how a company transfers cash generated from trading profits to its shareholders.

Like salary income, dividends received by individuals are taxed. There is a £2,000 tax-free allowance, but any amount after that is taxed according to your top “marginal” rate of income tax. Below you can see the proposed tax rate changes:

Income tax band

2021-22 dividend tax rate

2022-23 dividend tax rate

Basic rate

7.5%

8.75%

Higher rate

32.5%

33.75%

Additional rate

38.1%

39.35%

Why do buy to let landlords take dividends?
Landlords who invest via a limited or trading company can pay themselves (and any other company shareholders) dividends from the rental income profits. Dividends are paid out of profits that have already been subjected to Corporation Tax. The rate of tax on dividends for individuals is usually set by Government so that the combined effect of Corporation Tax and personal dividend tax on dividends received from listed company investments is comparable to the combined impact of Income Tax and NI (and the proposed Health and Social Care Levy) on salary payments.  

All tax rates are unchanged for 2021/22; in 2022/23 there will be an increase in dividend tax of 1.25%, which will carry through into 2023/24. 

How will this impact buy to let landlords?
How much this change will impact buy to let landlords depends entirely on their individual tax position, but most will likely see an increase in tax bills. The Government has stated that about 60% of people with dividend income outside of ISA’s will not be affected by the change due to the combination of tax-free dividend allowance and personal allowance. This prediction is unlikely to be relevant for most buy to let landlords due to the likely value of dividends from their buy to let investment companies. Despite this, if investing via a limited company is currently more tax-efficient for you, that’s highly unlikely to change. If you’re concerned, you should speak to a professional tax adviser about your position.

Corporation Tax

Back in March 2021, the Government announced that corporation tax would increase in April 2023. Currently, corporation tax is 19%, but in 2023 it will increase to 25% for businesses with profits exceeding £250,000. However, companies with profits below £50,000 (an estimated 1.5 million) will remain at 19%. For companies with profits between £50,000 and £250,000, there will be a marginal rate of 26.5%.

How will the corporation tax increase impact buy to let landlords?
For many landlords who are higher-rate income taxpayers, investing in property through a limited company is more tax-efficient due to the impact of the restriction on tax-deductibility of mortgage interest payments for individual buy to let investors, whereas limited companies receive a full tax deduction. For most buy to let investors, this distinction will continue to drive their decision making about investing through a limited company rather than personally.

Of course, the increase in Corporation Tax will negatively impact the after-tax profits for a few landlords with substantial portfolios, but the majority will see no or minor impact from 2023. Ultimately, the UK still has one of the lowest Corporation Tax rates of the G7 countries, even after this increase takes effect in 2023, and it still won’t be the 28% the UK had back in 2010!

So the combined impact of Corporation Tax on companies and of dividend tax on individuals will be dependent on the level of pre-tax profit in the limited company as shown below for a higher rate taxpayer:

Company profits

CT rate

Dividend tax rate

Combined tax rate

2021/22 rates

19%

32.5%

45.33%

2022/23 rates

19%

33.75%

46.34%

2023/24 rates

 

 

 

< £50,000

19%

33.75%

46.34%

£50,001 - £250,000

26.5%

33.75%

51.31%

> £250,000

25%

33.75%

50.31%

 

Combined impact of taxes

Set out below is a table showing the taxes that landlords pay in different scenarios based upon our current understanding of the proposed new Levy and assuming the investor is a Higher rate taxpayer:

 

Income tax

National Insurance

Levy (from 22/23)

CT

Dividend tax

Combined rate 2021/22

Combined rate 2023/24

Individual Investor

x

**

 

 

 

40.0%

40.0%

Limited company - salary

x

x

x

 

 

49.0%

50.7%

Limited company - dividends

 

 

 

x

x

45.3%

46.3% - 51.3%

** - Additional Class 4 NI may be payable if BTL is not an “investment”

These combined rates do not take into account the impact of allowances (e.g. personal allowances and dividend allowance of £2,000) nor the impact of transitioning between tax rates.

As has already been stated for many buy to let investors with mortgages, the impact of the treatment of mortgage interest costs means that the actual tax rate on their profits is far greater than the 40% indicated above and thus, this is not a viable option.

Summary

The upcoming tax changes are unlikely to significantly impact the tax planning strategies for limited company buy to let landlords, but clearly, life has become more complicated for taxpayers. Therefore, the need for professional tax advice has increased.  One tip that may be worth exploring over the coming months is whether landlords should pay dividends out of their limited companies during the remainder of 2021/22 to beat the rise in dividend tax in 2022/23. As always, you should seek professional tax advice on this.

Here at Mortgages for Business, we find property finance solutions for limited company landlords all the time. So, whether you’re purchasing, remortgaging or incorporating buy to let property, give me a call on 01732 471602, or email me at agatar@mortgagesforbusiness.co.uk.

NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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