Mastering the Art of Tax Efficiency: Director’s Salary and Dividend Strategies for 2023/24

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Stay Ahead with Tax-Efficient Strategies

With no further changes announced in the 2023 Spring Budget, it’s time to explore the most tax-efficient director’s salary and dividend strategies for 2023/24. This guide will provide an overview of the key tax rates and allowances and offer insights on maximising your post-tax income.

2023/24 Tax Landscape: Rates and Allowances

For English taxpayers in the 2023/24 tax year beginning on 6 April 2023, the main tax rates and allowances are:

  • The personal allowance is frozen at £12,570
  • Dividend allowance reduced to £1,000
  • The basic rate limit is fixed at £50,270
  • Additional rate threshold cut from £150,000 to £125,140

Note that Scottish taxpayers have different 2023/24 income tax rates, but these only apply to non-dividend income.

Dividend Taxation in 2023/24

The tax structure for dividends in 2023/24 is as follows:

  • Dividends within the unused personal allowance (£12,570) are tax-free
  • The first £1,000 of dividends above the personal allowance are 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%

Maximising Tax Efficiency for Director’s Salary and Dividends in 2023/24

A tax-efficient strategy for extracting post-tax profits from your company involves paying yourself a low salary and compensating with dividends. This approach has several benefits, including:

  • Salary being a tax-deductible cost for your company
  • No National Insurance contributions on dividends
  • Potentially paying yourself (and your civil partner/spouse) a salary that doesn’t create a National Insurance liability while still contributing to your state pension record.
  • Retaining surplus profits in your company for a future Business Asset Disposal Relief claim when the company is wound up

For the following examples, we make some basic assumptions: you are a UK tax resident, your contract is not caught by IR35, your only income is salary and dividends, and you have sufficient post-tax profits to pay dividends.

As shown below, there are two primary options for the most tax-efficient director’s salary and dividends for 2023/24.

Option 1: Salary Up to the Employer’s National Insurance Threshold

This approach assumes you are not entitled to the employment allowance because you are the company’s sole director. The strategy is to pay yourself a salary up to the Employer’s National Insurance Threshold (for the 2023/24 tax year, this is £758 per month or £9,096 per annum). This threshold is lower than the Employee’s National Insurance threshold, which equates to £12,570 per annum.

You can then pay dividends of £41,174 without paying any higher rate tax (basic rate band of £50,270 less salary of £9,096).

The tax liability for this approach will be £3,211, calculated as follows:

  • The tax-free personal allowance covers dividends of £3,474 after accounting for your salary of £9,096.
  • £1,000 of dividends are covered by the dividend allowance.
  • The remaining dividends of £36,700 will be taxed at 8.75%, amounting to a tax liability of £3,211.

Option 2: Salary Up to the Personal Allowance with Employment Allowance

This option might be preferable if you can claim the employment allowance (e.g., you have another employee or a family member working in your business). In this case, you can potentially pay yourself a salary of up to £12,570 per annum or £1,047.50 per month, resulting in dividends of £37,700 instead of £41,174 using the first option.

The tax liability for this approach is the same as in Option 1, £3,211, calculated as follows:

  • The first £1,000 of dividends is covered by the dividend allowance.
  • The remainder of £36,700 is taxed at 8.75%, resulting in a tax liability of £3,211.

Both strategies will have the same net income of £47,059 per annum or just over £3,921 monthly. However, paying yourself a higher salary of £12,570 will lead to greater corporation tax savings, as your salary is an allowable tax deduction for the company, whereas dividends are not. This might be a more attractive option as corporation tax rates increase from 1 April 2023.

Deciding Between Additional Salary or Dividends for Income Above £50,270

If you plan to extract more than £50,270 per annum from your company, you must consider paying yourself a salary bonus or taking higher dividends. We covered this topic later.

Tailoring Your Director’s Salary and Dividend Strategy for 2023/24

By understanding the tax landscape and strategically balancing your salary and dividends, you can optimise your financial position as a company director. It’s important to consider your circumstances and seek professional advice to ensure the most tax-efficient approach.

Ready to take control of your finances and make the most of tax-efficient strategies for 2023/24? Don’t hesitate to contact our expert team at Mercian Accountants. We offer personalised advice and support to help you maximise your income while complying with tax regulations. Contact us today to schedule a consultation and plan a successful financial future.

About Graham

Accountant specialising in tax, property, and estate planning. A regular speaker at landlord, property Investor, and later life planning events.

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