As a business owner, determining the ideal salary for company directors can be tricky.
Most directors will want to balance their salary and dividend payments to be as tax efficient as possible.
The 2023/24 tax year presents an array of factors to consider, such as income tax thresholds, National Insurance contributions (NICS), and personal tax allowances.
It is important to explore the key considerations that company directors should weigh up when balancing their salaries and dividends.
The tax-free personal allowance
The tax-free personal allowance for the 2023/24 tax year stands at £12,570. Keeping your salary below this threshold, will prevent any PAYE income tax becoming due.
However, for every £2 you earn above £100,000, you lose £1 of your personal allowance, meaning it drops to zero once your total income reaches £125,140.
National Insurance considerations
Your company will be required to pay 13.8 per cent in Employers NIC on salaries exceeding £9,100 per year.
The Employment Allowance allows eligible businesses to reclaim up to £5,000 in Employers NIC. However, companies with only one director on the payroll and no other employees do not qualify for this allowance.
You will also need to pay National Insurance personally if your salary is above the Primary Threshold (£12,570 for 2023/24).
Pension and minimum wage concerns
If your salary is too low, it may impact your state pension entitlement. To secure your entitlement to future state pension and benefits without paying National Insurance, ensure that your salary is above the Lower Earnings Limit (£6,396 for 2023/24).
Additionally, 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 above.
Since 6 April 2023, directors can withdraw a maximum salary of £758 per month without incurring National Insurance charges.
Also from this date, the first £1,000 of dividends are tax-free. Beyond that, dividend income is taxed as follows:
- Basic tax rate – 8.75 per cent
- Higher tax rate – 33.75 per cent.
- Additional tax rate (now above £125,140) – 39.35 per cent
All of the above factors need to be weighed up to arrive at a tax efficient strategy.
HMRC is increasing checks to ensure dividend payments are accurately recorded. To satisfy HMRC and Company law requirements, directors should consider company reserves, cash flow, personal tax situations, and director requirements when determining dividend amounts.
Additionally, directors should hold meetings to decide on dividend amounts and methods of payment, and prepare board minutes and dividend vouchers to evidence what has been decided.
If you need advice on remuneration for your directors, please get in touch.