As a director 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 for directors’ remuneration 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.
It’s important to note that a PAYE salary may incur higher income tax rates and national insurance (NI) 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 NI contributions and enjoy lower income tax rates however, they cannot be treated as tax-deductible expenses for the limited company.
The dividend allowance has been reduced to just £500 for the 2024/25 tax year. Dividend income falling in the basic rate band are taxable at 8.75% or 33.75% if they fall in the higher rate and 39.35% if they fall within the additional tax rate.
Remuneration recommendations for 2024/25
We advise directors’ who have utilised a low salary / high dividend approach before to continue using this method for the 2024/25 tax year, so the salary should remain at £9,100 (max before incurring NI) with any additional income paid as dividends. If there are other employees on the payroll, then it could be increased to the optimum salary of £12,570 with the balance paid as dividends.
Should directors’ pay themselves £12,570 the government will pay the NI so they can qualify for a state pension without making any NI contributions. No, it’s not a typo, yes you have read it correctly! The £1,047 per month or £241 per week, ensures that directors’ have ‘deemed’ to be making NI contributions for the purposes of a state pension.
Unfortunately, this salary does incur Employers NI of £478 and this will need to be paid over to HMRC however, the £478 is also a tax-deductible expense of the company. After paying a salary of £12,570, the first £500 worth of dividends are tax free, this means that the directors’ will have now earned £13,070 completely tax free.
Final reminder
Many directors would rather not pay HMRC anything however, paying a salary of £12,570 saves corporation tax of anywhere between £2,479 (19%) and £3,457 (26.5%). There are no corporation tax savings if dividends are paid.
A company can pay a director (who is also a shareholder) through either salaries and/or dividends.
A paid salary is a tax-deductible expense of the company. For the 2024/25 tax year, the corporation tax rates remain at 19%, 25% and 26.5% (marginal rate).
A dividend is not a tax-deductible expense for the company. Dividends can only be paid out of the profit reserves of the company. If the company has made losses in the past, it may not have sufficient profit reserves to pay dividends.
Scott Whitmore is Dafferns’ Senior Corporate Tax manager and is happy to assist should you have any concerns with your tax affairs.
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