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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. Therefore this post wili interest you if you're a small limited company. If you're looking for the relevant details for the current tax year (2023/24) you can find the information here.

Most tax effective director's salary and dividends for 2024/25

Tax rates and allowances for the 2024/25 tax year

Below is the position for taxpayers in England, Northern Ireland and Wales for the new tax year starting on 6th April 2024:

  • The tax-free personal allowance is static at £12,570.
  • The tax-free dividend allowance suffers a further reduction to £500. As a result any dividends paid in excess of this figure are potentially taxable.
  • The basic rate limit continues to remain static at £50,270.
  • There is no further reduction  in the additional rate threshold. So this continues to be £125,140.

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

For most director/shareholders, paying a modest salary and taking the balance as a dividend is the most tax effective way of extracting limited company profits. Furthermore, there are numerous benefits:

  • Firstly, your company isn't required to pay all its post-tax profits to you as dividends. Moreover, these can be retained and Business Asset Disposal Relief claimed when trading ceases.
  • Secondly, National Insurance contributions aren't payable on dividends. Although they aren't tax deductible from company profits.
  •  A director’s salary is a tax deductible expense for your company. Additionally you can  claim a deduction for any salaries paid to your spouse, civil partner or other family member. Especially  where they are supporting you in the business.
  • You can pay yourself (and you civil partner/spouse) a salary that doesn't create a National Insurance liability. Furthermore it does count towards your national insurance record for state pension.

The most tax effective director's salary and dividends for 2024/25

In the examples below, we've assumed you're UK tax resident, your not caught by IR35, your only income is salary and dividends. Additionally, you have no outstanding student loans. Lastly, we've made the assumption that you have sufficient post corporation tax profits to pay yourself dividends.

Option 1

This first option is preferable if claiming the employment allowance. For example, where you have another employee or a family member working in your business.

Paying a salary of up to £12,570 per annum or £1,047.50 per month means paying dividends of £37.700.

As a result, pay dividends of £37,700, means a personal income tax liability of £3,255 shown below:

  • Firstly £500 of dividends is covered by the dividend allowance.
  • Next the remainder of £37,200 is taxed at 8.75% producing a tax liability of £3,255.

Therefore choosing to pay the higher salary of £12,570 means a greater corporation tax saving. This is because salary is tax deductible for the company. Whereas dividends are not. This might be a more attractive as corporation tax rates have increased. 

Option 2

This alternative assumes you can't claim the employment allowance because you are the sole director. If that's the case, a salary up to the Employer’s National Insurance Threshold is paid.

For the 2024/25 tax year this is £758 a month or £9,096 per annum. This threshold is lower than the Employee's National Insurance threshold which amounts to £12.570 per annum.

As a result, dividends of £41,174 are paid without paying any higher rate tax (basic rate band of £50,270 less salary of £9,096).

Therefore, taking this amount as dividends, you'll have a tax liability of £3,255 detailed below:

  • Dividends of £3,474 are covered by the personal allowance after including your salary of £9.096.
  • An amount of £500 of dividends are covered by the dividend allowance.
  • The remaining dividends of £37,200 will be taxed at 8.75%. This amounts to the tax liability of £3,255 mentioned above.

Alternative company profit extraction

There is no 'one size fits all approach'. Therefore you could consider the following:

  • Firstly, company pension contributions can be a tax-efficient way to extract profits. They can reduce its corporation tax bill and don't count as a benefit in kind.
  • Timing your dividend payments can help you stay within lower tax bands. Therefore consider spreading dividend payments across several tax years. As a result you can utilise your personal allowance and basic rate band annually.
  • Assess your company's profits and personal tax position just prior to the end of the tax year. As a result, this can help you decide whether to take additional dividends or delay to the next tax year.

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.

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