One of the most common questions we’re asked by limited companies, is how the balance of Director’s salaries and dividends should be allocated over the financial year.
It makes sense to work within the guidelines to ensure you’re taking home as much income as you can and are being as tax efficient as possible.
What is the most tax efficient salary to take?
Following on from Rishi Sunak’s Spring Statement of last week, you may have noticed that he amended the National Insurance thresholds to bring them in line with the personal allowance.
This does mean that there are changes to the most tax efficient salary for directors.
Before we go into the different calculations, let’s take a step back and look at the pros and cons of taking a salary.
From a practical perspective, taking a sizeable salary can be great – it helps provide regular, consistent income throughout the year.
But, if you’re taking a sizeable salary as a Director of a limited company, your company can be liable for paying employer’s National Insurance, and you may also be liable for paying employee’s National Insurance on your salary. You’ll also be liable for paying income tax on your salary at the relevant threshold.
So, taking a large salary isn’t the most tax efficient way to allocate income for a Director, but this is where it gets interesting…
Because Directors of a business are technically classed as ‘office holders’ it is possible to take a salary below minimum wage – which sits below the tax-free personal allowance (£12,570 for 2022/23), which means there would be no tax to pay on this salary.
It is also possible to navigate salary thresholds to stay within all the relevant rules and guidelines, without paying National Insurance. The important thing to bear in mind is that you still want to make sure you’re building up qualifying years for the State Pension – so you need to navigate between the lower earning limits and National Insurance thresholds to make this work for you.
For those directors with other employees, the most tax efficient salary is now £1,047.50 per month gross, there will be an element of employees’ national insurance for the first 3 months which equates to around £30 a month, from July onwards there is no tax deducted for employee’s national insurance or income tax. The reason we specifically mention directors with employees, is that they will be able to claim the Employer Allowance which covers up to £5,000 of the employer’s national insurance.
For those directors without other employees, the most tax efficient salary is £758 per month for April, May and June, then this will increase to £1,047.50 from July onwards. This will be liable to employers’ national insurance of around £44 a month, but the corporation tax saving is £63 a month, which means you are £19 a month better off doing it this way from a tax perspective.
So how much can I take in dividends tax efficiently?
The dividend allowance remains at £2000 for the 2022/23 tax year. This means that you don’t pay tax on the first £2000 of your dividends.
Outside of this allowance, dividends are taxed in the following brackets:
|Any unused personal tax allowance (£12,570)
|Basic Rate (Up to £50,270)
|Higher Rate (Between £50,270 and £150,000)
|Additional Rate (Over £150,000)
The big thing to bear in mind from these numbers is the huge jump in the tax charges when total income (salary + dividends) starts moving above that basic rate income tax band.
If the mission was absolute ‘tax efficiency’ it would be prudent to ensure that your combined salary and dividends don’t exceed £50,270
What is the optimum balance of salary and dividends for Directors for 2022/23?
The answer to this question lies very much with your personal circumstances, and we’d recommend you seek professional financial advice based on your situation.
There are also considerations to consider if a business has multiple Directors.
But as a simple overview, we would recommend that for optimal tax efficiency that Directors took an annual salary of £9100 and dividends of £41,170.
This would result in a total income of £50,270 and tax payable of approximately £3123.75
|Dividends (within £12,570)
|Dividends (£2k tax free)
|Taxable Dividends to £50,270 Basic Rate
To confirm if you wish to increase your salary to the new amounts mentioned in the article, please contact Daniel on 01302 613 515 or email email@example.com