Determining the ideal salary for company directors can be tricky for business owners.
Often, most directors 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.
We explore the available options that company directors should assess 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. If you keep your salary below this threshold, you can avoid paying any PAYE income tax.
However, for every £2 you earn above £100,000, you lose £1 of your personal allowance, meaning it drops to zero once your income reaches £125,140.
National Insurance considerations
Your company will be required to pay 13.8% in Employers’ NICs on salaries exceeding £9,100 per year.
However, the Employment Allowance allows eligible businesses to reclaim up to £5,000 in Employers’ NICs.
To benefit from this, directors must earn at least £9,100, although this does not apply to sole directors without other employees.
If your salary exceeds the Primary Threshold (£12,570 for 2023/24), you must personally pay National Insurance.
Pension and minimum wage concerns
To understand how your state pension is affected by your National Insurance Contributions, consult with The Pension Service.
If your salary is too low, it may impact your pension entitlement. Your salary must exceed the Lower Earning Limit (£6,396 for 2023/24) to secure your entitlement to future state pensions and benefits without paying National Insurance.
You must pay yourself the National Minimum Wage (£10.42 per hour for adults over 23) if you have an employment contract with your company.
Director’s salary
If you are not earning any other income, directors can withdraw a maximum salary of £758. Also, from 6 April 2023, the first £1,000 of dividends remains tax-free. Beyond that, dividend income is taxed:
- Basic tax rate – 8.75%
- Higher tax rate – 33.75%
- Additional tax rate (now above £125,140) – 39.35%
You can reach a tax-efficient balance if you weigh these above points and your pay objectives.
Ensure compliance
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 payment methods, and record minutes to maintain accurate documentation.
If you need advice on remuneration for your directors, please get in touch.
