Determining the optimal salary for company directors can be a complex task for business owners. Many directors aim to balance their salary and dividend payments to maximise tax efficiency.
The 2023/24 tax year brings several factors into play, including income tax thresholds, National Insurance contributions (NICs), and personal tax allowances.
Company directors should carefully consider these elements when balancing their salaries and dividends.
Tax-Free Personal Allowance
For the 2023/24 tax year, the tax-free personal allowance is set at £12,570. Keeping your salary below this threshold helps you avoid PAYE income tax.
However, for every £2 earned above £100,000, you lose £1 of your personal allowance, which reduces to zero once your income reaches £125,140.
National Insurance
Companies must pay 13.8 per cent in Employers’ NICs on salaries exceeding £9,100 per year. The Employment Allowance, however, enables qualifying businesses to reclaim up to £5,000 in Employers’ NICs.
To benefit from this, directors need to earn a minimum of £9,100, although sole directors without other employees are not eligible.
Directors must also pay personal National Insurance if their salary exceeds the Primary Threshold (£12,570 for 2023/24).
Pension and Minimum Wage
Consult The Pension Service to understand the impact of your NICs on your state pension. A low salary may affect your pension entitlement.
To secure future state pension and benefits without paying National Insurance, ensure your salary is above the Lower Earnings Limit (£6,396 for 2023/24).
If you have an employment contract with your company, you must pay yourself the National Minimum Wage, which is £10.42 per hour for adults aged 23 or older.
Director’s Salary
From 6 April 2023, directors can withdraw a maximum salary of £758 per month without incurring National Insurance charges, assuming no other income is earned.
From the same date, the first £1,000 of dividends remains tax-free. Beyond this, dividend income is taxed as follows:
Taking into account all of these factors and each director’s pay objectives, you should be able to achieve a tax-efficient balance.
Compliance
HM Revenue & Customs (HMRC) is increasing checks to verify the accuracy of dividend payment records. Directors should consider company reserves, cash flow, personal tax situations, and director requirements when determining dividend amounts to meet HMRC and Company law requirements.
Furthermore, directors should hold meetings to decide on dividend amounts and payment methods, and record minutes to maintain proper documentation.
For guidance on remuneration for your directors, please contact us.
