For the 2023/24 tax year, the most tax-efficient salary for the majority of directors is £12,570 per annum. This equates to £1,047 per month which is the ideal balance of income and tax efficiency.
It’s common practice for owner managed businesses to pay themselves via a combination of low salary – higher dividend strategy, as this is the recommended approach for business owners looking to minimise their tax liabilities.
When identifying the ideal salary versus dividend combination, the balancing act is usually driven by the National Insurance thresholds. £12.570 a year will be the most tax efficient salary for the majority of SME business owners in 2023/24, with the remainder being paid as dividends.
Why is £12,570 the magic number?
This is the level at which taxpayers can earn income that is not subject to income tax or employee national insurance. Tipping over this threshold attracts income tax at 20% and national insurance.
For business owners, the ideal scenario is to pay out £12,570 as salary with any remuneration beyond this level being paid as dividends which don’t attract national insurance and have much lower tax rates.
When is £12,570 not the ideal salary?
I would want to review the circumstances of a director where the following apply:
- Earns additional income outside of their company, i.e., Pension or rental income, additional salary, etc.
- Company doesn’t have profits available to issue as a dividend, so they need to process their full remuneration via payroll.
- Company hasn’t yet started to trade, is working on pre-trade R&D activity and the director salary would be subject to an R&D claim.
Why does the recommended tax-efficient salary for a company director change most years?
The level is driven by National Insurance thresholds which has changed in recent years. You can earn up to £9,100 this tax year, not pay a penny in National Insurance, and still qualify for State pension entitlement. The same figure was £8,840 last year.
Why is £12,570 more tax efficient than £9,100?
At £12,570 there will be employer national insurance to pay of £479. But, the extra £479 you pay in employer national insurance [13.8%] is more than offset by the £659 corporation tax saved [19%]. So overall, you are better off by £180.
Summary points
- For tax year 2023/24, the most tax-efficient salary for the majority of directors is £12,570.
- For directors with additional income outside of their company, we will be in touch to confirm the optimal salary for your unique circumstances.
- For directors where company profits don’t currently allow a dividend to be taken, we will be in touch to confirm the optimal salary for your unique circumstances.
Disclaimer: The contents of this article are correct as at 4th April 2023 and are intended to provide general information only. Please contact us for tailored tax solutions that optimise your individual circumstances.