Optimal Directors Salary for 2023/24
2023/24 Tax Rates
The personal allowance was frozen at £12,570.
Tax-free dividend allowance was reduced to £1,000.
Basic rate was also frozen at £50,270.
Additional rate threshold was reduced from £150,000 to £125,140.
Tax Efficient Diretor’s Salary and Dividends
It’s long been the case that the most tax efficient method of paying yourself from your company has been to pay yourself a low salary with the balance taken as dividends. The reasoning for this is:
Any amounts taken as a salary (i.e. through payroll) are tax deductible for the company.
Dividends do not attract national insurance contributions.
Salaries can be set at a rate that counts towards your national insurance record for your state pension yet doesn’t actually create a national insurance liability.
Please note that the illustrations below assume that you are a UK tax resident, not within IR35 and your only income is salary and dividends from your company. Note also that to pay dividends the company must have sufficient post tax profits.
Option 1
If you are the sole director of the company and not entitled to the employment allowance (as you are the only employee) then this is likely to be the best option for you.
You would pay yourself a salary up to the Employer’s National Insurance Threshold. This amounts to £758 per month (£9,096 per annum).
Your income is then topped up with dividends. Dividends of up to £41,174 can be paid without hitting the higher rate tax bracket.
Tax would be payable as follows:
£3,474 of dividends are covered by your personal allowance (the remaining allowance is used on your salary of £9,096)
£1,000 of dividends are covered by the dividend allowance.
The remaining £36,700 of dividends are taxed at 8.75% (or £3,211).
Therefore the total tax payable is £3,211.
Option 2
If you are able to claim the employment allowance as you have another employee then this option will be attractive.
You would pay yourself a salary of £12,570 per year (£1,047 per month). Dividends of £37,700 would top this up. The tax liability would be the same as above.
£1,000 of dividends are covered by the dividend allowance.
The remaining £36,700 is taxed at 8.75% (or £3,211).
Both of these options result in the same net pay of £47,059 per annum.
The advantage of option 2 (assuming you have another employee) is that the corporation tax saving is greater as salaries are tax deductible, whereas dividends are paid from post-tax profits.
If you would like to discuss this further then please get in touch with us - katie@bluearrowaccounting.co.uk