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Most tax efficient director’s salary and dividends for 2023/24

No further changes were confirmed in the 2023 Spring Budget it seems appropriate to discuss the most tax efficient director's salary and dividends for 2023/24 before the start of the new tax year. If you're looking for the same information for the 2022/23 tax year then you can see this here.

The 2023/24 tax rates and allowances

Just by way of recap, for the 2023/24 tax year starting on 6 April 2023, the position for English taxpayers is as follows:

  • The tax-free personal allowance continues to be frozen at £12,570.
  • Unfortunately, the tax-free dividend allowance is reduced to £1,000. Therefore any amounts in excess of this figure are potentially taxable.
  • The basic rate limit remains fixed at £50,270.
  • The additional rate threshold has now been cut significantly from £150,000 to £125,140. This is perhaps the most significant change enforced by the chancellor.

Whilst Scottish taxpayers have different 2023/24 income tax rates to the rest f the UK these apply to non-dividend income only. 

For the 2023/34 tax year dividends are taxed as follows:

  • Any dividends within your un-used personal allowance (£12,570), are tax free
  • The first £1,000 of dividends above your personal allowance are taxed at 0%
  • Any dividends above £1,000 and within the basic tax band (up to £50,270) are taxed at 8.75%.
  • Those dividends in excess of £50,270) are taxed at 33.75%
  • If you receive dividends in excess of £125,140) these will be taxed at 39.35% 

Most tax efficient director's salary and dividends for 2023/24

For many years, the most tax efficient method of extracting your company's post tax profits has been to pay yourself a low salary with the balance as dividends. This can be advantageous for many reasons including:

  • If you pay yourself a director’s salary this can be claimed as a cost (and is tax deductible) for your company. You may also be able to claim a deduction for any salaries paid to your civil spouse or partner where they are supporting you in the business.
  • There are no National Insurance contributions due on dividends paid,
  • You can potentially pay yourself (and you civil partner/spouse) a salary that doesn't create a National Insurance liability, though it does count as a national insurance record for your state pension.
  • Your company doesn't need to pay out all its post-tax profits to you as dividends. These surplus profits can potentially be retained and form part of a Business Asset Disposal Relief claim when your company is wound up.

For the purposes of these examples below, we have made some basic assumptions, namely you are UK tax resident, your contract is not caught by IR35, your only income is salary and dividends and perhaps most importantly you have sufficient post tax profits to pay dividends.  

Taking the above into account, there are essentially two approaches to determine the most tax efficient director's salary and dividends for 2023/24.

The first approach

The first approach assumes that your are not entitled to the employment allowance because you are the sole director of the company. This strategy is to pay yourself a salary up to the Employer’s National Insurance Threshold (see full details below). 

For the 2023/24 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 equates 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 £3,211 which is calculated as set out below:

  • Dividends of £3,474 are covered by the tax free personal allowance and after taking into account your salary of £9.096.
  • An amount of £1,000 of dividends are covered by the dividend allowance.
  • The remaining dividends of £36,700 will be taxed at 8.75%. This amounts to the tax liability of £3,211 mentioned above.

The second alternative

This 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. 

If that's the case then you can potentially 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 as opposed to £41,174 using the first option.

If you pay yourself dividends of £37,700, you will have exactly the same tax liability of £3,211 which is calculated as set out below:

  • The first £1,000 of dividends is covered by the dividend allowance.
  • The remainder of £36,700 is taxed at 8.75% which results in a tax liability of £3,211.

Using either strategy will result in the same amount of net income of £47,059 per annum or just over £3,921 per month.

However 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 increase from 1 April 2023.

If you decide to extract more than £50,270 per annum from your company it will then potentially be a case of choosing to pay yourself a salary bonus or taking higher dividends. This topic will be covered in a later post.   

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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