As a limited company director/shareholder, deciding on the optimal director’s salary and dividend distribution for yourself can be a tricky task. There are several factors to consider, such as your personal tax situation, your company’s profits, and any other income you may have. In this post, we’ll discuss the optimum salary and dividend distribution for the tax year 2023-24.
Why should I pay myself a combination of salary and dividends?
Being a director you are technically an office holder of your personal company. Because employers and employees pay NICs on wages, it makes sense to pay yourself a lower (tax-free) salary and make up the difference with dividends.
The benefit of taking a monthly salary is that you’ll have steady earnings during the year, which should be underneath the minimum salary thresholds without breaching any regulations due to the fact directors’ are considered ‘office holders’ without a contract of employment.
Lenders also like to see a regular flow of income. So paying a regular salary is great when it comes to applying for personal mortgages. A regular dividend is also advantageous if you are being paid a lower salary.
How to qualify for state pension credits
Directors can earn more than the Lower Earnings Limit (£6,396 per year in 2023/24) and thereby accrue qualifying years for their State Pension by accepting pay that is higher than the Lower Earnings Limit.
If your salary is higher than the LEL but less than the Primary Threshold (£9,880), you will be eligible for full NI benefits without paying National Insurance.
Utilising personal allowance to avoid taxes
The amount you are allowed to earn before you must begin paying income tax is known as your Personal Allowance. Directors must learn about how this affects their salary and dividends.
- The Basic Personal Allowance will be £12,570 in 2023/24.
- Only the portion of your income above the Personal Allowance threshold is taxed. If you earn £14,000 in a year, for example, you will only pay income tax on £1,430.
- £1,430 (salary minus £12,570 (tax-free Personal Allowance)) The amount that is taxable is £1,430.
- You won’t pay tax or NI on a wage from your company that is less than the Primary Threshold for National Insurance (£12,570). This is aligned with the Personal Allowance for 2023/24.
- The secondary threshold of 2023/24 is £9,100. This means that your business will pay employers national insurance on earnings above £9,100.
- The employment allowance, which provides tax relief on the first £5,000 of employer’s national insurance remains unchanged for 23/24. There’s more on this below.
How are dividends taxed?
Dividends are taxed through self-assessment. You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).
You also get a dividend allowance each year. You only pay tax on any dividend income above the dividend allowance.
You do not pay tax on dividends from shares in an ISA.
The dividend allowance for 2023/24 is £1,000 (previously £2,000).
| Tax band | Tax rate on dividends over the allowance |
|---|---|
| Basic rate | 8.75% |
| Higher rate | 33.75% |
| Additional rate | 39.35% |
Does the Employment Allowance have an impact?
Employers who’re eligible for the Employment Allowance in 2023/24 can claim an allowance of £5,000 against the cost of the employer’s National Insurance.
Employers have to have as a minimum one worker in addition to a director who is paid above the National Insurance Secondary Threshold, £175 per week for 2023/24.
Directors’ salary in 2023/24: How much should I pay myself from my limited company?
When all taxes and allowances are factored in, whether a limited company director is a single director or if the company has more than one person determines the most tax-efficient salary. A single director’s optimum pay in 2022/23 is £9,100. The best salary is £11,908 if there are two or more directors.
In 2023/24, what is the ideal company remuneration for sole directors?
The most efficient monthly remuneration for sole directors is £758 in 2023/24.
Since you’re a sole director and give yourself a salary through your own limited company, £9,100 per year (or £758 per month) is the finest amount to pay yourself. Because of the following:
- Because it falls below the secondary threshold, your company will not be required to pay employer’s NI on it.
- Because this wage is below the primary level, you will not be required to pay employee NI.
- Because you earn more than the Lower Earnings Limit, you’ll continue to receive NI credits, which is good news for your state pension.
- This is less than the Personal Allowance, which is tax-free.
- The Employment Allowance is not available to sole directors.
Salary for two or more directors in 2023/24 what is the most tax-efficient?
If your company has two or more directors on the payroll, you are eligible for the Employment Allowance. The primary threshold has been raised to the PA threshold.
In 2023/24, the most efficient salary for two or more directors is £12,570.
Since two or more directors can accept an annual salary up to the primary threshold without having to pay employee NI, and then claim the £5,000 Employment Allowance to offset the percentage of employer NI they would otherwise have to pay, if this is the case.
What if I earn money from a different source?
The Basic Personal Allowance (£12,570) however, if you’ve already used it up because of different assets or income, the director’s payroll becomes PAYE payroll, and you will be issued tax and NI as usual.
Get in Touch for Expert Assistance in Growing your Business
Understanding the new tax year changes can be tough. It’s always a good idea to seek professional advice from an accountant or tax specialist (like us) to ensure that you are making the most of your tax allowances and obligations. We’re here to help you receive the optimum salary and dividend from your limited company.
Get in touch with us now to discover how we can support you further You can book a FREE strategy call HERE