What’s the most tax efficient director’s salary in 2023/24?

The 2023/24 tax year began on 6th April and there have been changes to tax thresholds for this tax year that you need to be aware of if you are a limited company director. To work out optimum director’s salary and dividends, you need to consider many areas.

It is important that as a director of a limited company, you pay yourself as tax efficiently as possible. How you pay yourself with a combination of tax efficient director’s salary and dividends will affect your personal tax bill and your corporation tax bill.

In this blog, we look at the optimum director’s salary levels, dividend levels combined with using your tax-free personal allowance, tax free dividend allowance and how to save corporation tax.

How should a director paying themselves a basic directors salary react to the 2023/24 tax changes?

Tax efficient director’s salary and dividends

Owners/directors of limited companies can decide how to pay themselves. This can be salary and dividends.

As a director of a limited company, you are also an employee of that limited company. This means you may have to pay National Insurance Contributions (NICs) on salary payments as both an employer and employee. It is also beneficial to pay yourself a combination of salary and dividend (as this is more tax efficient). Therefore, you need to understand:

• National insurance thresholds.
• Employer’s national insurance.
• Employee’s national insurance.
• National insurance qualifying payments for future state pension.
• Income tax free personal allowance.
• Employment allowance.
• Dividend allowance.
• Dividend tax rates.
• Personal tax rates.

How you pay yourself in 2023/24 will also depend on how many people there are employed in your company, future state pension qualification, and the optimum salary and dividends mix.

Employer and employee National Insurance contributions, thresholds and rates

The National Insurance threshold is the point at which you start paying National Insurance for both employers NI and employees NI.

The UK government announced at Spring Statement 2022 an increase in National Insurance thresholds (the point at which you start paying national insurance) for the 2022 to 2023 tax year. In the Autumn Statement 2022, the Government announced that National Insurance thresholds would be frozen at these 2022/23 rates until April 2028.

There are different national insurance thresholds for employer’s and employee’s NI, and you need to understand these to work out how much to pay yourself. These 2023/24 national insurance thresholds are:

• Employees’ National Insurance Primary Threshold is £12,570. You don’t pay employees’ NICs if your salary is below this level.
• Employers’ National Insurance Secondary Threshold is £9,100. Your company pays employers’ NI on salaries above this level unless it is eligible to claim the Employment Allowance.

The primary earnings limit for NI in 2023/24 is £12,570 per annum. If your annual salary exceeds this amount, then you the employee will need to pay NI contributions.

The lower earnings limit for NI in 2023/24 is £6,396 per annum. If you earn over this amount it will count as a qualifying year for your future state pension.

The secondary earnings limit for NI in 2023/24 is £9,100 per annum. If your annual salary exceeds this amount the employer (your business) will need to pay NI contributions.

Optimising your director’s salary to qualify for the State Pension

We have calculated two scenarios based on the new tax and Class 1 National insurance thresholds. These give you options for the most tax efficient salary and dividends, depending on your circumstances.

Scenario 1

You pay yourself an annual salary of £12,570 and dividends of £37,700. The amount of PAYE and personal tax due would be £3,390.11 per annum leaving you with a net annual take home pay of £46,579.89.

This equates to a monthly gross salary of £1,047.50 and monthly dividends of £3,141.67.

Scenario 2

You are on an annual salary of £9,100. Further, you take annual dividends of £41,470.00 per annum to take advantage of the basic tax threshold of £50,270/annum. The amount of personal tax & PAYE payable on this would be £3,211 per annum leaving you with a net annual take home pay of £47,058.75.

This equates to a monthly gross salary of £758.33 and monthly dividends of £3,430.83. In this scenario no NICs will be due.

Notes to consider:

When discussing the optimum salary for directors, these scenarios assume that you have no other income from other sources (e.g., employment, property, or investment). The reason for this is that if you do, your tax-free allowances may be being used elsewhere, which MAY mean paying yourself a basic salary is no longer tax efficient. Seek advice from us in these circumstances.

Any dividends over £41,470/annum will be taxed at either 33.75% or 39.35%.

Business owners are often concerned to keep their National Insurance qualifying payments running so they will be eligible for State Pension. As long salary is kept at the rates above, this record of payments is maintained despite no actual contributions for NI being made. These scenarios therefore ensure you will qualify for the state pension.

These calculations it is assumed that you are not receiving Child Benefit, however, if you are and your income exceeds £50,000/annum you may be subject to High Income Child Benefit Charge, so to avoid it you can reduce your dividends by £270/annum.

For companies with more than one employee or director

For the new 2023/24 tax year (6 April 2023 onwards) we recommend that you pay a monthly salary drawn from your company at £1,047.50 per month (£12,570 per annum).

This is because the threshold where both income tax and employee’s national insurance becomes payable is £12,570.

The threshold where employer’s (company) national insurance becomes payable is only £9,096. However, you can claim the employment allowance, which you are entitled to because you have more than one employee and/or director on the payroll, reduces the national insurance charge to nil.

Analysis

The outcome is subject to the rate of corporation tax applicable to the company. The analysis above is for the illustration purpose to help you understand which scenario leaves you with more money in your pocket.

Due to your personal circumstances if you require a bespoke calculation because of other income such as savings, rental, pensions, other dividends etc. please feel free to contact our team on 0330 088 6686, or email on enquiry@dnsaccountants.co.uk.

Income tax rates

2023/24 tax bands for England, Wales, and Northern Ireland.

Band Annual income Tax rate

Personal allowance £0 – £12,570 (for most people) 0%

Basic £12,571 – £50,270 20%

Higher £50,271 – £150,000 40%

Additional More than £150,000 45%

Paying tax on dividends

Dividends can only be paid out if the company has sufficient post tax profits. If the company has made losses in the past, it may not be possible to pay dividends. Higher salaries may be the only option.

Dividend payments are not subject to National Insurance, but dividends are taxed at a different rate to normal income tax.

You get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance. The government are reducing this tax-free dividend allowance this year and the coming years as follows:

Tax free dividend allowance

Tax Year Dividend Allowance

2023/24 £1,000

2024/25 £500

Dividend tax rates

How much tax you pay on dividends above the dividend allowance depends on your Income Tax band.

Tax band Tax rate on dividends over the allowance

Basic rate 8.75%

Higher rate 33.75%

Additional rate 39.35%

Can I use the tax-free Personal Allowance on my director’s salary?

Yes, you can. The Personal Allowance is the amount you are allowed to earn before you have to start paying income tax.

What if I have additional income?

The optimum amount for director’s salary, uses the personal tax allowance (£12,570). If you are already using this because you have additional income from elsewhere, then director’s payroll becomes PAYE company payroll, and subject to tax and NI as normal.

Tax efficient profit extraction

One of the advantages of operating as a limited company is the flexibility it provides in how and when you extract company profits from your business. Options include salaries and bonuses, dividend payments, pension contributions and interest payments on cash you’ve put into your business. Since the tax treatment is different in each case, this flexibility can be used as a key part of your overall tax planning.

The most tax-efficient method of extracting profits from an owner-managed business is to pay a low level of salary which utilises either the NIC thresholds or the personal allowance and then pay the remainder of the remuneration in the form of dividends as per the above scenarios.

Provided you can wait for the money, pension contributions are an extremely tax efficient way of taking profit out of the company. For the company, any contribution is a valid business expense, saving Corporation Tax rate of 19% - 25% and doesn’t incur any employer National Insurance Contributions.

Ensuring you claim all relevant tax-deductible business expenses is also key to good tax planning. Being knowledgeable about tax deductible expenses is a big part of running a successful business. Claiming business expenses is a simple way to keep your business tax-efficient as it reduces your profit, which in turn reduces your Corporation Tax liability and payments.

If you’ve invested money in the business, you can be paid interest on the amount you’ve lent, provided the interest rate is commercially justified. From the company’s perspective this is a valid business expense, with no National Insurance Contributions, saving tax at 19%.

Summary

For business owners of owner managed businesses, working out the most tax efficient way to pay yourself and how you structure this will depend on your personal circumstances and tax position. You need to consider the national insurance thresholds, personal allowance, dividend allowance, state pension, income tax & dividend tax rates and the employer’s allowance.

It is recommended that you seek advice if either or the above scenarios don’t suit your own personal needs. For more help and advice on the optimum director’s salary and dividend payments for 2023/24 contact our team on 0330 088 6686, or email on enquiry@dnsaccountants.co.uk.

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