Directors are responsible for managing and overseeing the operations of a company, and they are often compensated with a salary. However, when it comes to directors’ salaries, there are several factors to consider to ensure that they are tax efficient. In this post, we’ll explore the most tax-efficient salary for 2023/2024 in the UK, whether directors should pay themselves dividends, how National Insurance affects directors’ salaries, and whether directors can use the tax-free Personal Allowance on their salaries.
Most Tax-Efficient Salary for a Director in 2023/2024
The most tax efficient salary for 2023/2024 in the UK depends on several factors, such as the director’s personal circumstances and the company’s profits. Generally, it is advisable for directors to pay themselves a salary up to the National Insurance (NI) threshold, which is currently £9,568 for the 2021/2022 tax year. This allows directors to qualify for state benefits and contribute to their state pension.
Any additional income can be taken as dividends, which are taxed at a lower rate than salaries. For the 2021/2022 tax year, the tax on dividends is 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. Directors must ensure that they have enough retained profits in the company to pay themselves dividends and must declare these dividends on their self-assessment tax returns.
Should Directors Pay Themselves Dividends?
Directors should pay themselves dividends only if there are enough retained profits in the company to do so. If there are no retained profits, it is not possible to pay dividends. Directors should also consider the tax implications of paying themselves dividends, as they are taxed at a lower rate than salaries.
However, it is important to note that paying dividends does not qualify directors for state benefits or contribute to their state pension. Directors must pay National Insurance contributions on their salaries to qualify for these benefits.
What Does National Insurance Mean for Directors Salary?
National Insurance (NI) contributions must be taken into account when calculating a director’s salary. Directors are responsible for paying both employee and employer NI contributions. The employee NI contributions are deducted from the director’s salary, and the employer NI contributions are paid by the company.
For the 2021/2022 tax year, the employee NI rate is 12% on earnings above £9,568 up to £50,270, and 2% on earnings above £50,270. The employer NI rate is 13.8% on earnings above £8,840.
Can Directors Use the Tax-Free Personal Allowance on their Salary?
Directors can use the tax-free Personal Allowance on their salaries. For the 2021/2022 tax year, the Personal Allowance is £12,570. However, this allowance may be reduced if the director’s income exceeds a certain threshold.
Directors should also note that the Personal Allowance cannot be used on dividends, as they are already taxed at a lower rate than salaries.
Paying Tax on Dividends
Directors must declare their dividends on their self-assessment tax returns and pay any tax owed by 31 January following the end of the tax year. Directors must pay tax on their dividends, which are taxed at a lower rate than salaries. For the 2021/2022 tax year, the tax on dividends is 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. Also, from the 2022-23 tax year there are further changes in dividend tax rates. The basic rate has increased to 8.75% from 7.5%. Higher rate dividend taxpayers rate has been increased from 32.5% to 33.75%. Finally, additional rate dividend taxpayers will pay 39.35% instead of 38.1%.