As a director or shareholder of a limited company, you have the flexibility to choose the most tax-efficient approach for your personal remuneration.
In the past, a common strategy known as the ‘low salary / high dividend’ method was straightforward. It involved receiving an annual PAYE salary of either £9,100 or £12,570, coupled with dividends ranging from £50,000 to £100,000.
However, as of April 1, 2023, there were changes in the tax landscape. Corporation tax rates rose from 19% to a maximum of 25% depending on your company’s profits. Personal income taxes have also undergone modifications.
This means you now have more choices when it comes to determining the most advantageous remuneration strategy, taking into account your priorities and the circumstances of both your personal finances and your company.
It’s important to note that a PAYE salary may incur higher income tax rates and national insurance contributions compared to dividends. However, the benefit of a salary is that it can be considered as a tax-deductible expense for the limited company, resulting in a reduction in the amount of corporation tax paid. On the other hand, dividends do not attract national insurance contributions and enjoy lower income tax rates, but they cannot be treated as tax-deductible expenses for the limited company.
The dividend allowance has been reduced to just £1,000 for the 2023/24 tax year. Dividend income falling in the basic rate band are taxable at 8.75%, 33.75% if they fall in the higher rate and 39.35% if they fall within the additional tax rate.
Recommendations for 2023/24
We advise individuals who have utilised a low salary / high dividend approach in the past to continue employing this method for the 2023/24 tax year as by doing so, you can maintain a comparable personal net income as in previous years.
If you are a director with no other employees, the salary should be set at £9,100 with any additional income paid as dividends. If there are other employees on the payroll, the salary could be increased to £12,570 with the balance paid as dividends.
It is important to note that the low salary / high dividend strategy may not necessarily remain the most tax-efficient overall strategy when considering the corporation tax position of the company, which depends on profits.
Please contact us if you would like to explore your optimum salary and company tax position.