When it comes to determining the appropriate salary for directors, tax efficiency is a crucial consideration that you cannot afford to ignore.
The Spring budget has brought some changes. Therefore you should start your year by looking at the most tax efficient director's salary for 2023/24.
In this blog post, we will explore some of the most tax-efficient ways to structure directors' salaries and how to optimize your tax.
The most tax efficient director's salary for 2023/2024
With the above changes in mind, let's explore some of the most tax-efficient ways to structure directors' salaries.
Option one is £578 per month
This option is for a sole director with no employees who are not entitled to the employment allowance.
The salary of £578 per month will take you up to the second threshold for NI, which means you won't pay any. However, it will take you over the first threshold of Class 1 NI of £6,396, which means you will qualify for the pension.
You can then take dividends of £3,474 tax-free as you will fit into your personal allowance of £12,570
You will pay a tax of 8.75% on any further dividends up to £36,700
You will only pay £3,211 tax on £50,250 and qualify for the pension.
The one thing to remember for this strategy is that the Dividend Allowance, although the £1,000 is tax-free, is included in the basic tax rate band threshold of £12,570. Meaning you lose it in the above example.
The second option is to take £1,047.50 per month.
The most tax efficient for limited companies with more than one director or employee entitled to the employment allowance.
Pay yourself £12,570, which is your tax-free personal allowance.
Get £1,000 dividend tax-free.
Pay 13,8% NI on £3,740m, which is £478.86 (£12,570 less £9,100; your personal allowance less your NI threshold)
Your tax liability will be the same as in example one.
However, the tax liability of your limited company will be lower, as salaries are allowable expenses for the company, and the salary in the second example is higher than the one in the first.
Final thoughts
Both options will work for you, depending on where you are in your business and what you want to achieve. For example, if you are starting and want to see where it takes you, option one would be ideal for you, but if you are more established, option two would be better for you, as that would reduce your corporation tax.
You can read more about advantages and disadvantages of having a limited company here.
Testimonials
Rea Moores Creates
Starting up my own business I had no idea how much would be involved in preparing the tax at the end of the tax year and how much time bookkeeping would take. Fortunately Jana was at hand to help me. She guided me through all the steps needed for her to submit the documents to the tax office, answered all the questions I asked, and put me at ease. I would recommend brush up accounting to anyone that needed this service.
QualClean Ltd
I have engaged Jana as the permanent accountant for QualClean Ltd as my accountant of 7 years advised me, he was retiring.
In the last 12-18 months I have become a little disorganised due to workload, illness and several other external factors. This has resulted in me not staying on top of my accounting, bookkeeping and invoice payment chasing.
In less than 2 months, Jana has very efficiently organised me and has set me up with a whole new system to aid my efficiency. Moreover she has been really proactive in pointing out issues in my bookkeeping and most importantly, my invoice chasing. This has resulted in recovering monies that I had no idea I was missing!
I thank Jana for her highly fastidious approach and care and I have no hesitation in recommending her to colleagues and friends.
Nikki Ayton
Brush Up Accounting was recommended to me by a mutual friend and Jana has been like a breath of fresh air. I needed someone approachable, professional and experienced and I got all three.
Jana was excellent at communicating with me and she has always got back to me within 24 hours (if not sooner). She has made an onerous task a lot simpler by explaining the process step by step.
I highly recommend working with Brush Up Accounting.
