Determining an optimal salary for company directors can be a complex task for business owners. Striking the perfect balance between salary and dividend payments is crucial to ensure tax efficiency. As we’ve entered the 2023/24 tax year, there are several key factors that directors need to consider, including income tax thresholds, National Insurance contributions (NICs), and personal tax allowances. In this article, we will delve into the essential considerations that company directors should weigh when navigating the intricacies of salary and dividend distributions.
Maximising Tax Efficiency: The Tax-Free Personal Allowance
A critical factor to keep in mind is the tax-free personal allowance for the upcoming tax year, which stands at £12,570. By structuring director salaries below this threshold, one can avoid paying any PAYE income tax.
However, it’s important to note that the personal allowance reduces by £1 for every £2 earned above £100,000. Eventually, the personal allowance completely vanishes when income reaches £125,140.
Balancing National Insurance Contributions
Directors must carefully evaluate National Insurance contributions to optimize their financial strategies. When a director’s salary exceeds £9,100 per year, the company becomes responsible for paying 13.8% in Employers’ NICs.
However, eligible businesses can reclaim up to £5,000 in Employers’ NICs through the Employment Allowance. This allowance is applicable if directors earn at least £9,100, though it doesn’t apply to sole directors without other employees.
Additionally, directors with salaries surpassing the Primary Threshold (£12,570 for 2023/24) are personally liable for paying National Insurance contributions.
Pension and Minimum Wage Considerations
Directors should also pay attention to the impact of National Insurance contributions on their state pension. A low salary may potentially affect pension entitlement. To safeguard future state pension and benefits without paying National Insurance, directors should ensure their salary exceeds the Lower Earnings Limit (£6,396 for 2023/24).
Furthermore, directors with employment contracts must pay themselves at least the National Minimum Wage, currently set at £10.42 per hour for adults aged 23 or above.
Structuring Director’s Salary Effectively
Commencing from 6th April 2023, directors can withdraw a maximum salary of £758 per month without incurring National Insurance charges, provided they have no other income. Additionally, the first £1,000 of dividends remains tax-free. However, any dividend income exceeding this threshold will be subject to the following tax rates:
- Basic tax rate: 8.75%
- Higher tax rate: 33.75%
- Additional tax rate (income above £125,140): 39.35%
By carefully considering all the factors discussed above and aligning them with the specific objectives of each director, it is possible to strike a well-balanced approach that optimises tax efficiency.
Meeting Compliance Requirements
To ensure compliance with HMRC and Company law, directors must meticulously record dividend payments. This includes considering factors such as company reserves, cash flow, personal tax situations, and director requirements when determining dividend amounts. Holding meetings to deliberate on dividend amounts and payment methods, along with keeping accurate documentation through recorded minutes, is essential.
If you require professional advice on remuneration strategies for your directors, we are here to assist you. Feel free to reach out to our team for guidance tailored to your specific needs.