This blog post discusses the most tax efficient Director salary strategies for the 2023/24 financial year.
As a director of a limited company, the most tax efficient way to take an income from your business is through a combination of salary and dividends. Directors are technically employees of their own limited companies, so you can’t simply withdraw money in the same way a sole trader can.
As salaries are subject to National Insurance contributions, but dividends aren’t, it will often make sense as a director to pay yourself a smaller salary and top up your income with dividend payments.
As a way of earning a regular income throughout the year, you can pay yourself a director’s salary. As directors are classed as “office holders”, this salary does not have to meet national minimum wage requirements. How much you pay yourself as salary really depends on both how tax efficient you want to be as well as how much you would feel comfortable living off.
As mentioned earlier, salaries are subject to National Insurance contributions (NICs). However, there are two different types of NICs – Employer’s contributions and Employee’s contributions. As you are technically both an employer and an employee, it would not be tax efficient for you to pay National Insurance twice on the same salary.
There are other factors to take into consideration as well, such as your State Pension, and whether you want to accrue National Insurance benefits. Another important point to note is that salaries are an allowable expense when it comes to claiming tax relief on Corporation Tax.
The three different National Insurance thresholds to take into consideration are as follows:
Lower Earnings Limit (LEL)
If you earn below the LEL, you do not have to pay any NI as an employer or employee, but you don’t get any benefits such as contributions towards your State Pension
Above this threshold is where employees start to pay NI. Any earnings in between the LEL and the Primary threshold are not subject to any NI but will accrue NI benefits.
Salary payments above this threshold are where employers must make NICs.
The following is the most tax efficient salary for each of these thresholds for the 2023/24 tax year:
This means that if you are the sole director of your company with no other staff members, the most tax efficient salary to take would be the Secondary Threshold annual salary of £9,100 as you would not pay any NI at all.
However, things are different depending on how many other people are in the business. Eligible employers with members of staff can claim up to £5,000 of Employment Allowance to cover the costs of employer’s NI. This only applies to companies who have at least one employee, or two directors on payroll, and you will not be eligible if a director is already claiming Employment Allowance for another company.
This means that if you have two or more directors and are eligible for Employment Allowance, it would make sense to take a Primary Threshold salary as your Employment allowance would offset the Employer’s NICs. This means the most tax efficient director’s salary for two or more directors in 2023/24 is £12,570.
You do not pay any tax on income through dividends that fall within your Personal Allowance (your tax-free income). You also get a dividend allowance each year, and you only pay tax on any dividend income above the dividend allowance. Unlike salaries, dividends are not a tax-deductible expense when it comes to Corporation Tax.
The dividend allowance for the 2023/24 tax year as reduced from £2,000 to £1,000. If you withdraw dividends above the dividend allowance, the amount of tax you will pay on it depends on your income tax band.
This means that, for example, if you’re a basic rate tax-payer with the standard personal allowance of £12,570, and you earn between £12,571 and £50,270 in the tax year, any dividends you take over £1,000 that fall outside your personal allowance would only be subject to 8.75% tax as opposed to the 20% tax rate if this amount was paid as a salary.
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