Director's Optimal Salary 2023/24 | www.colliermarshaccountancy.co.uk

Background

For the 2023/24 the personal tax threshold of £12,570 is frozen. There are changes to the national insurance thresholds and these affect the optimal salary threshold for small, owner managed businesses:

The primary national insurance threshold (the level at which employees start to pay national insurance) has been increased to align with the personal tax threshold of £12,570;
The secondary national insurance threshold (the level at which employers start to pay National insurance) will be £9,100; and
The lower earnings limit (the threshold at which individuals are able to obtain national insurance credits, but are not required to pay national insurance) is £6,396. It is important to pay a salary over the lower earnings limit (LEL) for NICs in order to qualify for certain state benefits.

In addition, the dividend allowance falls to £1,000 for 2023/24 (previously £2,000).

The Employment Allowance remains at £5,000 for those businesses that are eligible. The rules regarding employment allowance remain unchanged with regard to companies where there is only a single employee who is a director - the employment allowance is not available. However, the employment allowance is restricted, from 6 April 2020, to those employers whose employer NICs bill was below £100,000 in the previous tax year. In addition, as the employment allowance counts as 'de minimus state aid', employers will need to ensure claiming the employment allowance doesn't take them above the de minimus state aid threshold. Employers will need to claim the employment allowance and check they meet eligibility criteria. Employers who are connected to other employers (such as companies within a group) will need to add together all of their employer Class 1 NICs liabilities incurred in the tax year prior to the year of claim to determine eligibility.

Optimal Salary

The optimal salary for an individual will vary from person to person, and will be dependent on a number of factors, namely business income, income required by an individual, family members being involved in the business, other income from outside of the business and potential impact of National Living Wage, where a contract of employment is in place.

A common strategy is to take a low salary and a higher proportion of dividends for many small owner, managed businesses. The effective tax rates in respect of dividends are lower than paying a salary, and there are no NICs (employee or employer) payable on dividends, which in the past has made the use of dividends as a form of remuneration more attractive and tax efficient. A small salary is usually taken as part of the strategy, as this is allowable for corporation tax purposes, whereas dividends are not, thus providing a small reduction in corporation tax.

Dividends are taxed at lower rates of income tax and therefore, anything income from the business above the personal allowance is recommended to be paid as dividends, rather than salary.

Tax efficient remuneration

Generally, for an owner managed business (OMB), where there is a single director, who is also a shareholder, the most efficient remuneration package is to pay a salary up to £12,570 (personal allowance and primary national insurance threshold). This equates to earnings of £1,047.50 pcm. Anything above this amount should be paid in dividends. Paying a salary at this level with ensure that the taxpayer will qualify for state pension, but will not be required to pay national insurance contributions.

There will be some employers’ national insurance payable, however, this is offset by the corporation tax and personal tax savings.

If a business is eligible for the employment allowance (and this is unused), this would avoid to employer’s national insurance.

Tax efficient remuneration – avoiding national insurance

Where a business wants to avoid the administration burden of processing and paying employer’s national insurance, they should pay a salary up to the secondary national insurance threshold of £9,100 (£758.33 pcm). Any amounts payable above this level, should be paid as dividends.

Note – all of the above scenarios pay a salary above the lower earnings limit and therefore will ensure eligibility for certain state benefits for the 2022/23 tax year, such as state pension.

Please note the above scenarios take into account the following assumptions, unless stated otherwise:

There is no student loan balance;
The only income is salary and dividends;
There is no contract of employment to state that NMW is applicable;
IR35 is not relevant;
The company has sufficient distributable reserves, out of which the dividends can be paid; and
Corporation tax is only payable at the small profits rate of 19%.

Nil salary for director/owners

Small, owner managed businesses have the flexibility to pay director/owner via salary and/or dividends. Salaries are tax deductable when computing corporation tax, and hence can reduce the amount of corporation tax payable - can be between £2,388 and £3,331, depending upon the relevant corporation tax rate. However, dividends are not tax deductable, as they are paid out of distributable reserves (retained earnings).

It is therefore tax efficient to pay a small salary and dividend, for most owner, managed businesses.

A nil salary may be advisable, where the director/owner has income from other employment, pension or rental properties. If you fall within the catergory, please contact us to discuss your specific circumstances.

Tax planning

Tax savings may be available through splitting of income with spouses or family members, via transfers of shareholdings.
Company pension contributions continue to be tax deductible for the company with no tax implications for individuals, up to the annual and lifetime allowance – see Spring Budget 2023 for further information regarding the latest pension allowances.
If the company is run from home, the director may be able to charge to company rent, although this would need to be declared as income is a self assessment tax return and taxed accordingly.
A company can only declare a dividend, where there are sufficient distributable profits to pay the dividend. Where there are insufficient distributable profits to pay dividends, the dividend would be classed as unlawful.

Each business is different and the above illustrations may not be applicable for some businesses, therefore please contact us to discuss your and your businesses individual circumstances.

Please note our anslysis relates to UK taxpayers, but excludes Scottish taxpayers which are under devolved tax rules. For further information for Scottish taxpayers please contact us directly.