Quick answer: For most UK company directors, the most tax-efficient salary for the 2024/25 financial year is £12,570, combined with dividend payments.
As a director, you’re at the helm of your company’s journey to success. But when it comes to your own pay, how do you ensure tax efficiency without sailing into choppy waters? It’s all about finding the right balance between salary and dividends amidst the complexities of taxation.
In this blog, we’ll delve into the intricacies of crafting the most tax-efficient director’s salary in the UK for 2024/25. From deciphering statutory regulations to exploring practical implications, join us on a journey into directorial remuneration strategies.
Understanding the Basics: Salary vs. Dividends
Directors of limited companies often take a combination of salary and dividends as remuneration. The key advantage of this approach is that salaries are subject to Income Tax and National Insurance Contributions (NICs), while dividends are taxed at lower rates and do not attract NICs. However, finding the right balance is crucial to maximise tax efficiency.
Salary
A director’s salary is considered employment income and is subject to both Income Tax and NICs. The salary paid to a director is also a deductible expense for the company, reducing the company’s Corporation Tax liability.
Dividends
Dividends are sums distributed to shareholders from the company’s profits remaining after taxes have been paid. They are not deductible for Corporation Tax purposes but are generally taxed at lower rates than salary and do not incur NICs.
The Personal Allowance
In the 2024/25 tax year, the personal allowance continues to stand at £12,570. This threshold signifies the income you can earn before becoming liable to pay Income Tax. By setting a salary at or just below this threshold, directors can minimise their Income Tax liability.
National Insurance Contributions
Employee NICs
For employees, NICs are payable on earnings above the primary threshold. The primary threshold for 2024/25 is aligned with the personal allowance at £12,570 per year. NICs are charged at:
- 8% on earnings between £12,570 and £50,270
- 2% on earnings above £50,270
Employer NICs
Employers are required to pay NICs on earnings that exceed the secondary threshold. For 2024/25, the secondary threshold is set at £9,100. The rate is 13.8% on earnings above this level.
Given these thresholds, it’s advantageous for directors to set their salary at the primary threshold to avoid employee NICs while keeping employer NICs manageable.
Salary for Companies with One Employee or Director
When you’re the only one calling the shots, how do you decide on your salary? Let’s break down the options.
Taking a Salary of £12,570 (£1,047.50 per month)
For a sole director taking a salary at the personal allowance level of £12,570:
Advantages:
- Utilises the full personal allowance.
- The company can claim the salary as an allowable expense for Corporation Tax purposes, reducing the company’s overall tax liability.
- Provides a qualifying year for state pension and benefits.
Disadvantages:
- Incurs employer NICs of £478.86 annually, but this can be offset by the Employment Allowance if applicable).
Taking a Salary of £9,100 (£758.33 per month)
Let’s take a look at a sole director taking a salary at the secondary NIC threshold of £9,100.
Advantages:
- Avoids both Income Tax and NICs.
- Leaves more profit in the company to be distributed as dividends, which are taxed at a lower rate.
Disadvantages:
- Does not fully utilise the personal allowance, potentially leaving some tax-free income unused.
- May result in lower state pension contributions.
Salary for Companies with More Than One Employee or Director
For companies with multiple employees, the strategy may differ due to the availability of the Employment Allowance, which allows eligible businesses to reduce their NICs bill by up to £5,000.
Taking a Salary of £12,570 (£1,047.50 per month)
Let’s examine this option for directors in companies with more than one employee.
Advantages:
- Utilises the full personal allowance.
- The employer NICs incurred can be offset by the Employment Allowance.
- Results in no Income Tax.
- The company can claim the salary as an allowable expense for Corporation Tax purposes, reducing the company’s overall tax liability.
- Provides a qualifying year for state pension and benefits.
Disadvantages:
- Employment Allowance is only available to companies with multiple employees. If not eligible, the employer NICs would be payable.
Taking a Salary of £9,100 (£758.33 per month)
For directors in companies with multiple employees, here are the advantages and disadvantages of a salary of £9,100.
Advantages:
- Avoids both Income Tax and NICs.
- Allows for a greater amount of profit to remain within the company, which can then be distributed as dividends.
- Dividends are subject to taxation at a reduced rate.
Disadvantages:
- Does not fully utilise the personal allowance, potentially leaving some tax-free income unused.
- May result in lower state pension contributions.
Are Salaries an Allowable Expense for Corporation Tax?
Salaries are an allowable expense for Corporation Tax purposes, which means that the company can deduct the amount paid in salaries from its profits before calculating its Corporation Tax liability. This reduces the overall taxable profit of the company, thereby lowering the Corporation Tax payable.
How Does the National Insurance Employment Allowance Affect Director’s Pay?
The Employment Allowance allows eligible businesses to reduce their NICs bill by up to £5,000. However, companies where the sole employee is a director are generally not eligible for this allowance. For companies with additional employees, the allowance can significantly offset NICs costs.
Example: Employment Allowance Impact
For a company with multiple employees, setting a director’s salary at £12,570 incurs employer NICs of £479.34. With the Employment Allowance, these NICs can be offset, resulting in no additional cost to the company.
Summing Up
The most tax-efficient director’s salary for the 2024/25 tax year involves a strategic combination of salary and dividends. By supplementing your salary with dividends, directors can minimise tax liabilities while maximising their take-home pay.
How an Accountant Can Help
It’s always recommended to consult with a tax professional to tailor this strategy to your specific circumstances and ensure compliance with all relevant regulations. An accountant can provide invaluable assistance by:
- Advising on optimal salary structures tailored to individual circumstances.
- Ensuring accurate and timely filings with HMRC.
- Implementing cost-effective strategies to minimise tax liabilities.
- Keeping businesses informed about regulatory updates and deadlines relevant to director’s salaries.
- Providing peace of mind that salary arrangements are compliant and optimised for financial success.
How CRM Can Help
For personalised advice and comprehensive financial planning, contact CRM Accountants. We specialise in helping directors maximise their tax efficiency and achieve their financial goals. Our experts stay up-to-date with the latest tax regulations and can provide bespoke advice to suit your unique situation.
Backed by a team of seasoned professionals, we offer personalised solutions and a proactive approach to meet your specific requirements. Whether you’re a budding startup or a well-established corporation, we’re dedicated to guiding you through the intricacies of finance and realising your business ambitions.
Next steps
For advice or assistance with tax-efficient salaries, you can count on CRM. Get in touch by completing our contact form or give us a call at 01865 379272. We’re here to simplify your financial journey.
