As we are well into the 2023/24 tax year, many companies are considering what the best salary for a director is for this period. In this blog post, our accountant team have outlined what the most tax-efficient salary and dividend structure is for the current tax year. Understanding the tax rates and allowances is important for effective tax planning.
Our accountancy team at Freedom in Numbers aims to provide insights and guidance into the optimal salary and dividends level for directors, considering the figures applicable to the current tax year.
We all know that tax planning is a complex area, and individual circumstances vary, so it is best to seek advice from our accountancy team to ensure that your business stays compliant and keeps the HMRC happy whilst maximising your tax efficiency.
Our team have pulled together a summary of the current tax rates and allowances for directors in the UK. Here’s a recap of the figures below:
Salary tax for directors
Personal Allowance: The tax-free personal allowance is frozen at £12,570 for the 2023/24 tax year. This figure remains unchanged and rolls over from the 2022/23 tax year.
Basic Rate Limit: The 20% income tax basic rate limit remains at £50,270, this has been held at the same level as the previous tax year.
Additional Rate Threshold: The 45% income tax additional rate threshold has been significantly reduced from £150,000 to £125,140, making it a notable change implemented by the Chancellor.
It’s important to note that Scottish taxpayers have different income tax rates for 2023/24, but those rates apply only to non-dividend income. You can find out more about Scottish income tax rates here: Scottish Income Tax.
Dividend tax for directors
Dividend Allowance: The tax-free dividend allowance has been reduced to £1,000 for the current tax year, this is a reduction of half from the previous year. Any dividends exceeding this amount are potentially taxable.
For the tax year 2023/24, dividends in England and Wales are taxed as follows:
Dividends within the unused personal allowance (£12,570) are tax-free.
The first £1,000 of dividends above the personal allowance is taxed at 0%.
Dividends above £1,000 and within the basic tax band (up to £50,270) are taxed at 8.75%.
Dividends exceeding £50,270 are taxed at 33.75%.
Dividends above £125,140 are taxed at 39.35%.
In previous years, the most tax efficient method was always a smaller salary and larger dividends allowing a company to save on national insurance contributions, but due to the recent changes announced by the chancellor, it isn’t as clear cut as this anymore. In 2023/24, there are more factors to consider, especially when we also consider the increases in corporation tax rates for companies with taxable profits of more than £50,000.
To provide some examples, we assume you are a UK tax resident, are not subject to IR35, and have no income other than salary and dividends. Additionally, we assume you have sufficient post-tax profits to pay dividends.
There are two general approaches to consider:
The first approach for director’s tax:
- Pay yourself a salary up to the Employer’s National Insurance Threshold, which is £9,100 per annum (£758 per month).
- You can then take dividends of £41,170 without paying a higher tax rate.
- The tax liability on these dividends would be £3,211.
The second approach for director’s tax:
- If you can claim the employment allowance, which requires having another employee or a family member working in your business, you can pay yourself a salary of up to £12,570 per annum (£1,047.50 per month).
- In this case, you can take dividends of £37,700 without incurring a higher tax rate.
- The tax liability on these dividends would also be £3,211.
Both approaches have a net income of £47,059 per annum or just over £3,921 monthly. However, choosing the higher salary option may yield more significant corporation tax savings as the salary is tax-deductible for the company, unlike dividends. This could be especially attractive as corporation tax rates changed from April 2023.
If you wish to extract more than £50,270 per annum from your company, you can consider options such as a salary, bonus or higher dividends. It is important to remember that this general outline does not consider individual circumstances that may vary, and it’s crucial to speak with a qualified accountant or tax professional for personalised advice based on your specific situation and the most recent HMRC guidelines.
Navigating the complexities of tax planning as a director in the UK requires careful consideration and expert guidance. The figures and numbers in this blog post serve as a starting point, however, it is essential to speak with knowledgeable professionals to tailor the most tax-efficient strategy to your specific requirements.
At Freedom in Numbers, our experienced accountants help companies find the best salary for a director, and optimise their tax positions to ensure compliance while maximising your potential savings. Contact us today to benefit from our expertise and receive personalised advice tailored to your unique situation. Call us on 0114 400 0053 or fill out a quick questionnaire to get the advice and support you need to achieve your financial goals.