What’s the Most Tax Efficient Director’s Salary in 2023/24?
As a director of a limited company, it’s important to pay yourself a salary that is both tax-efficient and fair. A director’s salary is subject to income tax and national insurance contributions (NICs), so finding the most tax-efficient way to pay yourself is essential to maximize your take-home pay. In this article, we’ll explore the most tax-efficient director’s salary for the 2023/24 tax year and how Your Ecommerce Accountant can help you to achieve it.
Why should I pay myself a director’s salary as well as dividends?
The most tax-efficient way for a director to pay themselves is usually through a combination of salary and dividend payments. A basic salary is an allowable expense for corporation tax purposes and also incurs some tax relief and little to no NICs. Meanwhile, dividends are subject to lower tax rates than salaries and don’t incur any NICs.
What are the employer and employee National Insurance thresholds and rates?
For the 2023/24 tax year, the primary threshold for employee NICs is £9,568 per year, which means that employees only start to pay NICs on earnings above this threshold. The secondary threshold, which is the point at which employers start to pay NICs, is £9,100 per year. The employer’s NIC rate is 13.8% of earnings above this threshold.
Can I use the tax-free Personal Allowance on my director’s salary?
Yes, you can use your tax-free Personal Allowance on your director’s salary. The tax saving for Personal Allowance for the 2023/24 tax year is £12,570. This means that you can earn up to £12,570 in salary before you start to pay income tax.
Paying tax on dividends
Dividends are taxed at a lower rate than salaries. For the 2023/24 tax year, the dividend tax rates are:
0% on the first £1,000 of dividends
8.75% on dividends within the basic rate band
33.75% on dividends within the higher rate band
39.35% on dividends within the additional rate band
If you have only income of a salary of £9,100 and dividends of £30,000, your tax liability would be:
No income tax on your salary as it’s within your personal allowance
No employee NICs on your salary as it’s below the primary threshold
No employer NICs on your salary as it’s below the secondary threshold
£1,000 of your dividends would be tax-free
£24,000 of your dividends would be taxed at the basic rate of 8.75%, resulting in a tax liability of £2,100
£4,000 of your dividends would be taxed at the higher rate of 33.75%, resulting in a tax liability of £1,350
Your total tax liability would be £3,450
Are salaries an allowable expense for Corporation Tax?
Yes, salaries are an allowable expense for corporation tax purposes. This means that you can deduct your director’s salary from your company’s profits when calculating your corporation dividend income tax liability.
How to determine the most tax efficient Directors’ salary
The most tax-efficient director’s salary will depend on your circumstances, such as your level of income, the number of directors and employees in your company, and your eligibility for certain tax allowances. Your Ecommerce Accountant can help you to determine the most tax-efficient salary for your specific situation, taking into account all of these factors and ensuring that you comply with all relevant tax regulations.
A word about Child Benefit
It’s worth noting that if you or your partner earn over £50,000 a year, you may have to pay a tax charge on your Child Benefit. If your monthly salary alone, including any dividends you receive, pushes you over this threshold, you may wish to reduce your salary to avoid this additional charge.
Optimising your director’s salary to qualify for the State Pension
It’s important to note that your entitlement to the State Pension is based on your employer’s National Insurance contributions. If you’re paying yourself a director’s salary that’s below the Lower Earnings Limit of £6,240 per year, you won’t be making any National Insurance contributions and may not be eligible for the full State Pension.
To ensure that you’re qualifying for the State Pension while still paying the most tax-efficient director’s salary, it’s generally recommended to have limited company directors pay yourself a salary of at least £9,568 per year, which will count towards your National Insurance record.
Income tax thresholds
As mentioned earlier, your director’s salary is subject to income tax. For the 2023/24 tax year, the basic rate income tax threshold is £37,700, meaning that you’ll pay 20% tax on any income you receive above this basic tax band threshold.
For higher earners, the higher rate income tax threshold is £150,000, and you’ll pay 40% tax on any income above this amount. It’s important to keep these thresholds in mind when considering your director’s salary, as you may be able to minimise your tax liability by adjusting your salary to stay within the lower tax brackets.
Two or more Directors
If your company has two or more directors or employees, you’ll be eligible for the Employment Allowance, which allows you to claim up to £5,000 per year off your employer National Insurance bill. In this case, claim the employment allowance whose most tax-efficient salary is usually £12,570 per year, as this will keep you below the higher rate income tax threshold, while also covering the employer National Insurance liability.
Taking a salary of £12,570 (£1,047.50 per month)
Based on the above information, if you’re a sole director with no other income, you have the choice between a annual salary of £9,100 or optimum salary of £12,570 per year. While the lower salary will save you from the hassle of dealing with payroll obligations, paying yourself £12,570 will provide greater tax savings in the form of reduced corporation tax liability.
For companies with two or more directors or employees, a salary of £12,570 is usually the most tax-efficient choice, as it covers both the personal tax-free allowance and the employer pay National Insurance contributions and liability, while also keeping you below the higher rate income tax threshold.
The Dividend Allowance is the amount of dividends you can receive tax-free each year, and it is currently set at £2,000 for the tax year 2022/23. In the tax year 2023/24 this will reduce to £1000 each year. Any dividends you receive above this allowance will be subject to tax at the appropriate dividend tax rate, which depends on your income tax band. It is worth noting that the Dividend Allowance is separate from your personal allowance and does not affect your eligibility to receive it. Therefore, paying yourself a combination tax free dividend allowance out of salary and dividends can be a tax-efficient way to take money out of your company.
What are salary and dividends impact on corporation tax
When it comes to calculating corporation tax, there is a difference between salary and dividends. Salary is considered an allowable expense for corporation tax purposes, meaning that it reduces the company’s taxable profits, while dividends are not. Dividends are paid out of profits after corporation tax has been paid, so they do not directly affect the company’s tax bill. However, the payment of dividends may result in lower corporation tax for the company because they reduce the company’s retained profits, which are subject to corporation tax. Additionally, if a company pays out dividends to its shareholders, it may be eligible for certain tax credits, which can further reduce its corporation tax liability.
How much can you save by using an optimum directors salary
The overall corporation tax saving you can make on your tax bill by using an optimum director’s salary can be significant. By paying yourself a salary below the national insurance threshold and taking the remainder of your income in dividends, you can reduce your overall tax liability. The corporation tax savings generated by the salary expense being tax-deductible and the reduced national insurance contributions can all add up to a substantial saving. The exact amount will depend on individual circumstances, but it’s always worth considering the most tax-efficient way to pay yourself to ensure you’re making the most of your income.
Is an optimum directors salary worth it for ecommerce business owners
For ecommerce business owners, understanding the difference between salary and dividends is crucial to maximizing tax efficiency. Since many ecommerce businesses are operated by small teams or sole proprietors, paying oneself a salary and dividends can be a particularly effective way to minimize tax liability. By taking advantage of the personal tax-free allowance, which covers basic salary, and the lower tax rates on dividends, business owners can reduce their overall tax bill.
Additionally, ecommerce business owners should consider working with an accountant who specializes in ecommerce accounting to optimize their tax strategy. These specialists can help ecommerce businesses navigate the unique tax considerations involved in online retail, such as VAT on cross-border sales, inventory management, and the use of online marketplaces. With the right guidance, ecommerce business owners can ensure that their tax strategy is optimized for their business, industry, and long-term goals.
How Your Ecommerce Accountant can help
As specialist ecommerce accountants, Your Ecommerce Accountant can help you determine the most tax-efficient director’s salary for your business, taking into account your unique circumstances and any other sources of additional income you may have.
Our experienced team can also assist with payroll processing, ensuring that you meet all of your obligations as an employer and stay compliant with HMRC regulations.
We can also provide advice on dividends and other tax-efficient methods of extracting profits from your business, as well as handling all of your bookkeeping, VAT returns, and year-end accounts.
Contact us today to learn more about how we can help your ecommerce business maximise its tax efficiency and profitability.