Most tax effective director’s salary and dividends for 2024/25
As the 2024 Spring Budget has confirmed the changes for the new tax year we’ll cover the most tax effective director’s salary and dividends for 2024/25. This post will be of interest if you're a small business with directors and shareholders. If you're looking for the relevant details for the current tax year (2023/24) you can find the information here.
Tax rates and allowances for the 2024/25 tax year
As a starting point we'll detail below the position for taxpayers in England, Northern Ireland and Wales for the new tax year starting on 6th April 2024:
The income tax rates are slightly different for Scottish taxpayers as you can see here.
Overview - Most tax effective director's salary and dividends for 2024/25
If you're a director/shareholder, paying yourself a modest salary and taking the balance as a dividend is common tax planning technique for extracting profits from your limited company. There are a number of benefits to this approach:
What is the most tax effective director's salary and dividends for 2024/25?
In these examples we've set out below, we've assumed you're UK tax resident, your contract is not caught by IR35, your only income is salary and dividends plus you have no outstanding student loans. Last and by no means least perhaps we've made the assumption that you have sufficient post corporation tax profits to pay yourself dividends.
Option 1
This first option might be preferable if you are able to claim the employment allowance mentioned above. For example, where you have another employee or a family member working in your business.
Where you pay yourself a salary of up to £12,570 per annum or £1,047.50 per month. This would mean you would pay yourself dividends of £37.700.
If you pay yourself dividends of £37,700, you will have a personal income tax liability of £3,255 which is calculated as set out below:
If you choose to pay yourself the higher salary of £12,570 this will result in a greater corporation tax saving as your salary is an allowable tax deduction for the company whereas dividends are not. This might be a more attractive option as corporation tax rates are now higher than previously.
Option 2
This alternative assumes that your are not entitled to the employment allowance because you are the only director of your company. If that's the case, you pay yourself a salary up to the Employer’s National Insurance Threshold (see full details below).
For the 2024/25 tax year this is £758 a month or £9,096 per annum. This threshold is actually lower than the Employee's National Insurance threshold which amounts to £12.570 per annum.
You can then pay dividends of £41,174 without paying any higher rate tax (basic rate band of £50,270 less salary of £9,096).
If you take this amount as dividends, you will have tax to pay of £3,255 which is calculated as set out below:
Other considerations for profit extraction from your company
This is by no means a 'one size fits all approach' and there are other considerations that could be borne in mind:
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.