Director tax-efficient salary recommendations
Article original published in Issue 6 – JT AccountS Newsletter
Starting a limited company is often a sensible choice for self-employed workers, but it can present you with a lot of things to get your head around.
One of the differences between being paid by an employer and running your own business is having to sort out how your limited company pays you. Usually, the most tax-efficient way you can do this is by taking a combination of a low salary and dividends from your limited company. The salary will be paid to you as a director, in the same way as a regular employee.
To maximise your tax efficiency as a Company Director and Shareholder in the 2023/24 tax year, we would recommend your company should pay you a salary of £8,760 and dividends of up to £41,510 (if profits allow for this).
This ensures you steer clear of the higher dividend tax rate band and allows you to use all the basic rate band of tax, where you pay tax at 20%, and assumes you have no other income (employment, property or investment). Your total personal tax bill would then be £3,211, on take-home pay of £47,059. This equates to a monthly gross salary of £730.00 and monthly dividends of £3,459.17.
If, however, you take more income in dividends, you will pay tax on these at a higher rate of 33.75% as a higher rate taxpayer.
What about dividends?
Unlike your salary, NICs are not applied to dividends. Dividend tax rates have the same bands as income tax, but different tax rates for each band.
The tax rates payable on dividends are as follows for 2023/4:
– Personal Allowance (up to £12,570) – tax-free
– Basic Rate (£12,571 to £50,270) – 8.75%
– Higher Rate (£50,271 – £125,140) – 33.75%
– Additional Rate (over £125,140) – 39.35%
Importantly, your salary (and other additional income) will use up your Personal Allowance first, before dividends are taxed.
If you have any questions about any of the above or you’d like your limited company to pay you more in salary, then speak directly to Jacqui.
• Avoid any unnecessary charges for finance – you can lose hundreds, even thousands, of pounds each year by going over your business credit card limit and being late with loan repayments. By staying on top of bills and paying them on time, you can avoid such interest charges. Keep a schedule and set up alerts to remind you when payments are due, automating as much of this process as you can.
• Tap into business funding – do you know what funding is available out there and what is appropriate for your business? When looking into this, you need to consider what assets you have available to back the funding as you will be asked this. For example, you may qualify for small-business rate relief on your property.
• Digital payments – are you making it easy for your customers to pay you by making digital payments available to them e.g., Stripe or Go Cardless?
• Focus – are you focusing enough time on your business to drive sales and generate growth – think about outsourcing your payroll as this can be quite time consuming at the end of every month. Outsourcing will free up some of your valuable time. Again, we can help with this.
• Future-proofing your business – in volatile times like now do you have a `business risk register’ to help you anticipate and overcome challenges with confidence? For example, what if your costs go up by 10% in your key product lines or your business funding gets squeezed even further – think about what’s going to hurt your business as well as what’s going to kill it and have a plan in place so that you don’t have to react in the moment and risk making costly last-minute decisions.
• Making Tax Digital – perhaps now is the time for you to go fully digital in terms of how you provide your company data to us so that we can use that to give you an insight into cash flow forecasting to help your business (we are able to offer this via QuickBooks) as well as to provide you with analytics to help you make informed business decisions going forward. Speak to us about going fully digital.
OTHER NEWSLETTER TOPICS IN ISSUE 6:
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Related Newletters and Articles:
THIS NEWSLETTER TOPICS: Helping businesses tackle the current financial climate! – Director tax-efficient salary recommendations – The New Basis Period Reform – Voluntary National Insurance Contributions – Today not Tomorrow!
The World Economic Forum has identified the cost-of-living crisis as the number-one global risk for the next two years.
Voluntary National Insurance contributions can help make sure you have enough qualifying years to get the full State Pension. You need to make full contributions for a total of 35 years to obtain a full state pension.
Practice Number: 21331
Jacqueline Tetley is licensed and regulated by AAT under licence number 5096.