As an owner-managed business, you have the flexibility to decide how you pay yourself – through a salary, dividends, or a combination of both. However, it’s important to determine the best salary and dividends combination for directors in 2023-2024 to ensure that you’re paying yourself in the most tax-efficient way possible. Worry not; we’ve got you covered!
Best Salary for 2023-2024 for directors
So, let’s dive right in. The sweet spot for a director’s salary in 2023/24 is £12,570 per year, which breaks down to £1,047 per month or £241 per week. Cool, right? This amount tends to be the most tax-efficient for most directors.
Now, as an owner-managed business, you have the power to decide how you’d like to pay yourself. You can choose a salary, dividends, or a combination of both. If you’re a director without any other income, it’s a great idea to pay yourself the optimal director’s salary of £12,570 and take any extra income as dividends. From 2023 onwards, you can take £1000 as dividends tax free as it is the tax free Dividend Allowance, and the rest will be taxed at 8.75% up to £37,700 as a basic rate taxpayer.
The salary of £12,570 will save the company corporation tax of at least £2,388.
A director who earns £50,270 through a combination of salary and dividends will pay personal taxes of £3,211. This is, therefore, an effective tax rate on the £50,270 income of just over 6%.
Why £12,570, you ask?
Well, it’s all about National Insurance (NI) rates. Here’s a quick rundown:
- The lower earnings limit for NI in 2023/24 is £6,396 per year. Earning above this amount counts towards qualifying years for your future state pension.
- The primary earnings limit for NI is £12,570 per year. If your annual salary goes beyond this limit, you’ll need to pay NI contributions as an employee.
- The secondary earnings limit for NI is £9,100 per year. If your salary is above this limit, your business (as the employer) has to pay NI contributions.
By paying a salary of £12,570, you qualify for a state pension without having to pay any personal NI contributions. That’s pretty neat, right? Plus, the personal allowance and primary NI threshold are now the same, both at £12,570.
Why not a £nil salary?
You might be wondering if it’s better to pay yourself only through dividends. Well, a salary is a tax-deductible expense for your company, while dividends aren’t. By paying a salary of £12,570, you can save your company corporation tax between £2,388 and £3,331, depending on the tax rate. Also, this salary amount ensures you’re adding another qualifying year towards your state pension.
However, there are situations where a £nil salary might make sense. For instance, if you have other income sources like pension income, another salary, or rental income, it could be advisable to pay a £nil salary. In these cases, it’s crucial to get expert tax advice to avoid potential tax liabilities.
Dividends vs. higher salaries
When your income exceeds £12,570, both NI and income taxes kick in. The combined NI and income tax rates are generally higher than the dividend tax rate. So, even with the corporation tax reduction on salaries, paying dividends turns out to be more tax-efficient.
Sole directors, listen up!
If you’re a sole director without other employees, you don’t benefit from the employment allowance. This means you’ll have a £478 employers NI payable. But don’t worry, paying a higher salary of £12,570 still saves corporation tax of at least £750, going up to £1,046 depending on the corporation tax rate. So, go ahead and pay yourself £1,047.50 per month.
So, there you have it. The optimum director’s salary for 2023/24 is £12,570 per annum; the rest of the drawings are as dividends. But please remember that many assumptions are made when concluding the above figures. In conclusion, determining the optimum director’s salary for 2023/24 is crucial to ensure that you’re paying yourself in the most tax-efficient way possible. However, it’s important to consider your individual circumstances and seek specialist tax advice to make the best decision.