Owner managed businesses can typically decide how to pay themselves and this can be either a salary, dividends or a mixture of both.

If you are a Director and Shareholder of a Limited company, you may be wondering what’s the most tax efficient way is to pay yourself in the tax year 2023/24.

Personal allowance

In 2023/24, the personal allowance is staying at £12,570 which means you can pay yourself up to this amount without paying tax.

National Insurance

Recently, there have been some changes to National Insurance thresholds:

~ The lower earnings limit for National Insurance is £6,396 per year. If you earn over this amount it will count as a qualifying year for your future state pension.

~ The primary earnings limit for National Insurance is £12,570 per year. If your annual salary exceeds this amount, then you as the employee will need to pay NI contributions.

~ The secondary earnings limit for National Insurance is £9,100 per year. If your annual salary exceeds this amount the employer, ie your Company, will need to pay NI contributions.

Employment Allowance

The Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £5,000. You’ll pay less employers’ Class 1 National Insurance each time you run your payroll until the £5,000 has gone or the tax year ends (whichever is sooner). You can still claim the allowance if your liability was less than £5,000 a year.

You can claim the Employment Allowance if your employers’ Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.

You cannot claim the Employment Allowance if you only have one employee paid above the secondary earning limit AND the employee is also a Director of the company.

What is the optimum Directors salary for a sole Director in 2023/24?

As a sole Director with no other employees, you may think it makes sense to pay yourself £9,100 per year as you can’t claim the Employment Allowance. This is true but when you take into account the corporation tax savings, you should still pay yourself £12,570.

A Directors salary of £12,570 saves corporation tax of at least £2,388 (This is calculated on 19% but the tax savings could be greater if you fall into the higher rate of corporation tax.)

Sometimes a NIL salary is the best option

If your personal allowance is available, then £12,570 is the optimum amount for the year but if you have another salary, have pension income or rental income, your personal allowance may already be used up. In this case, it may be advisable to pay a NIL salary.

Topping up your earnings

Obviously most people cannot live on just £12,570, so you should look at topping up your annual salary with dividends. Dividends are taxed at a rate significantly lower than the NI and Income Tax rates combined. Paying dividends is still more tax efficient even when accounting for the corporation tax savings on a higher salary.

You can only pay dividends if the Company has sufficient profits available so it’s really important that you have up to date financial data so you can decide whether a dividend is available for payment.

If you need help with salaries and dividends, we’d love to hear from you: hello@opticsaccounting.co.uk