Business owners who pay themselves through a combination of salary and dividends should revisit their remuneration strategy this tax year.
With Income Tax thresholds frozen until 2028 and a lower dividend allowance rate of £500, a strategy that once worked may now cost more than it saves.
How should you be paid as a director?
A salary of £12,570 uses the full Personal Allowance and qualifies you for National Insurance (NI) credits without triggering personal Income Tax or employee NICs.
This regular salary combined with dividends, where payable, and a generous pension scheme, could help you to reduce the amount of Income Tax that you are liable to pay.
If your company qualifies for Employment Allowance, which has now increased to £10,500, even employer NICs can be mitigated.
Lower salaries of around £6,500 may suit directors with other sources of NIC credits or pension plans, while avoiding employee contributions altogether.
Dividends
You need to remember that any dividend income above £500 will be taxed at the dividend tax rate of 8.75 per cent, 33.75 per cent or 39.35 per cent, depending on your marginal rate of Income Tax – basic, higher and additional, respectively.
While dividend tax rates remain lower than Income Tax rates, the reduced allowance means higher effective rates for many compared to what they have experienced in the past.
However, a carefully planned director’s remuneration strategy, which incorporates dividends, can still help to minimise an individual’s annual tax bill.
When dividends cannot be paid to directors
Your company’s profitability and your shareholding will determine the level of dividends you can pay yourself, as dividends can only be distributed from retained profits after Corporation Tax.
That means if your company is not making a profit, you won’t be able to distribute dividends, and you will be limited to drawing a salary.
Setting your remuneration strategy
A blend of salary and dividends remains one of the most popular ways for directors to pay themselves, but achieving the most tax-efficient approach involves careful planning.
To ensure your approach is both tax-efficient and aligned with your broader financial strategy, it’s important to consult an experienced tax adviser who can help you optimise your liabilities and retain more of your income.
