One of the main benefits of working via a limited company is that you can take advantage of tax planning measures not available via other business structures (such as umbrella companies).
This article has been updated for the 2023/24 tax year.
The main benefit of drawing down dividends from your company is that they are not subject to National Insurance deductions, unlike salaried income.
As a company director, as you are in control of your own finances; you can decide when to declare company dividends – you may want to postpone taking a certain amount of dividends until a future tax year, for example.
For a number of reasons we will explore below, most limited company professionals pay themselves a small salary and distribute the rest of their company profits as dividends.
Optimum salary for company directors in 2023/24 – key considerations
When deciding on the level of salary you pay yourself in the current tax year, you need to consider various factors, particularly the current income tax (personal allowance) and National Insurance thresholds.
- Take into account any salary already earned from a previous job (if applicable), when working out how much further salary you wish to draw down in the current tax year.
- The current tax-free personal allowance is £12,570, so if your salary is less than this amount, you will have no PAYE income tax to pay at all.
- The value of the personal allowance is gradually withdrawn by £1 for every £2 you earn above £100,000 each tax year. This means that your entire personal allowance will have been removed by the time you hit the £125,140 mark.
- Your company pays 13.8% Employers’ NICs on salaries above the Secondary Threshold of £175/week (£9,100/year).
- The ‘Employment Allowance’ allows eligible businesses to reclaim up to £5,000 in Employers’ NICs. However, company directors who receive small salaries will not benefit unless they earn £9,100 or more.
- You cannot claim the EA if you are a sole director, with no other employees.
- As a company employee, you pay 12% Employees’ NICs on wages in excess of the Primary Threshold (PT). Employees’ NICs are 2% on income over £50,270 per year.
- You can check the latest NIC rates and thresholds here.
- Check with The Pension Service to see if your state pension will be affected by the level of NICs you pay, as if you pay yourself too low a salary, you may affect your pension entitlement. You can access a personal pension statement if you register online via the Government Gateway.
- If you have a contract of employment with your company (however unlikely this may be), then you must pay yourself the National Minimum Wage @ £10.42 per hour for adults aged 23 or over.
- You should also check with your accountant if there is a minimum salary required if you make contributions to a personal or executive pension scheme.
This article assumes that your contract work is not subject to the IR35 rules. Any income caught by IR35 must be taxed in the form of a deemed salary, rather than dividends.
Salary & Dividends Calculator
Try our updated 2023-4 salary and dividends calculator to work out how much tax you will pay this year.
What is a tax-efficient director’s salary in 2023/24?
As well as looking at the new NIC thresholds, the optimum salary paid to directors depends on whether your company can claim the Employment Allowance (EA) or not.
This incentive refunds the NIC bills of eligible businesses to encourage them to take on staff.
The rules changed in April 2016, so if you’re the sole director of a company (with no other employees), you cannot claim it. There are several other restrictions that limit the eligibility of many small companies.
Corporation Tax also increased from April 2023:
- The first £50,000 of profits are taxed at 19% still.
- Profits between £50,000 and £250,000 are taxed at 26.5%.
- Profits over £250,000 are taxed at 25%.
As a result, any Corporation Tax savings mentioned below will be higher if your profits are above £50,000 for the tax year.
a) £9,100 (tax efficient, hassle-free)
For the 2023/4 tax year, if you pay a £9,100 director’s salary, you will pay no income tax or Employees’ National Insurance at all. This number is the Secondary Threshold, below which no Employers’ NICs are payable.
£9,100 is a tax-efficient salary if your company cannot claim the EA. No NIC or Income Tax is payable.
This is a hassle-free, and tax-efficient salary for single-director companies, although £12,570 is slightly more tax-efficient, but involves more administration (see below).
b) £12,570 (optimum for single-director companies)
If you opt to pay a director’s salary of £12,570, there is no income tax, or Employees’ NI to pay, although the company will have to pay some Employers’ NI on the amount of salary above the £9,100 Secondary Threshold.
The company pays an extra £478.86 in Employers’ NICs, but saves an extra £750.28 in Corporation Tax compared to the £9,100 salary level. This means that the company is £271.41 better off.
This is the most tax-efficient salary for single-director companies, although you may prefer the simplicity of the lower £9,100 salary, which requires no payroll interaction with HMRC.
c) £12,570 (if the company can claim the Employment Allowance)
If your company can claim the EA and pays each director/employee a salary of £12,570, there is no income tax to pay (as this is the same amount as the personal allowance).
Ordinarily, the director and the company would also have to pay Employers’ NICs of £478.86.
However, the Employers’ NIC element is cancelled out by the Employment Allowance.
Also, by taking a £12,570 salary, the company saves £659.30 in additional Corporation Tax compared to the £9,100 salary level (per employee).
So, £12,570 is the most tax-efficient director’s salary for the 2022/23 tax year if you can claim the EA. The company is better off by £659.30 per employee.
Try our salary & dividends calculator to find out how much tax you’ll pay.
The calculations in this article have been validated by our accountant. We recommend that you seek professional advice from your own accountant before setting your company’s salary levels.
When working out dividend amounts, you must ensure that you have sufficient retained profit in your company, otherwise your dividend declaration could be classed as ‘illegal’.
You should discuss your overall remuneration strategy with your accountant before relying on any information contained within this article; after all, this is the most important aspect of the service they should provide you.