Optimum Director Salary and Dividends 2023/24 – Limited Company Directors

When you are trading through your own limited company one of the key tax planning items for you to consider is how much salary and dividends to pay.

The advice in this article is aimed towards limited company contractors, freelancers and micro businesses with one or two directors / shareholders.

To start with we’ll go back to basics to understand the differences between a shareholder and a director.

The shareholders of a company own a company through their holding of shares and they appoint directors to run the company on their behalf.

In a micro business, the shareholders and directors will often be the same person / people, but it’s important to understand the difference between the two roles.

When it comes to salary and dividends, a salary may be paid to directors for performing their duties as an officer of the company, and a dividend may be paid to shareholders for their share of post-tax distributed profits.

This article covers salary and dividends for the 2023/24 tax year (6th April 2023 to 5th April 2024) – if you would like to read our equivalent article for the 2024/25 tax year click here.

As always, we would advise that you discuss your specific circumstances with a professional before taking any action.

Anything we outline in this article is just general in nature, it is up to you as the director / shareholder to decide how much salary and/or dividends you want to pay.

Here are some key assumptions we have made in this article:

• You are a UK resident tax payer with a standard personal allowance
• Your only source of income is your salary and dividends from your limited company – on this point, because of the increase in interest rates it is likely that you may have some taxable interest income you need to factor into your tax planning and may need to decrease your dividends accordingly
• There are other potential tax affecting issues that we have not covered in this article, including (but not limited to) student loan repayments, child benefit high income tax charge and the withdrawal of the personal allowance once your income exceeds £100,000
• You are not working inside of IR35

 

 

 

How are salary and dividends taxed in 2023/24

For 2023/24 the personal allowance remains the same as the previous year at £12,570 – this means your first £12,570 of income is tax free.

Also the higher tax band has remained the same at £50,270.

For income above this, the tax rates are as below (these do not apply to dividends which we discuss further down):

• £12,570 to £50,270         20%  
  
• £50,270 to £125,140      40%  
  
• £125,140 +                            45%

Scottish resident tax payers have slightly different tax bands for 2023/24, here:

• £12,570 to £14,732         19%
• £14,732 to £25,688         20%
• £25,688 to £43,662         21%
• £43,662 to £125,140      42%
• £125,140 +                            47%

The key change to the above income tax thresholds compared to the previous tax year is that the top rate threshold has been reduced from £150,000 to £125,140.

There are further thresholds and tax issues to be aware of but we’ll keep it simple for this article.

 

When it comes to dividend tax rates there are not separate tax rates and bands for Scottish tax payers – the dividends tax rates for 2023/24 for all UK tax payers are as follows:

The dividend allowance has been reduced to £1,000 (for the previous year it was £2,000) – this means the first £1,000 of your dividends are tax free.

Over and above this £1,000, the dividend income is taxed as follows:

• If you have any un-used personal allowance (£12,570), that element is tax free
• Any dividends in the basic tax band (up to £50,270) attract a tax charge of 8.75%
• Dividends above the basic tax band (over £50,270) are charged at 33.75%
• Any dividends in the upper tax band (£125,140+) are taxed at 39.35%.

As an example, if your only income was dividend income, you could receive £13,570 of tax free dividend income in 23/24.

This is due to both your £12,570 personal allowance and also the £1,000 dividend allowance.

 

Most tax efficient dividend and salary structure for 23/24

For limited company contractors, freelancers and small business owners, taking a low salary with the balance of income being extracted as dividends is a common tax planning strategy.

The rationale for this is as follows:

• Withdraw a low tax efficient salary, no higher than the personal allowance so that it does not attract personal tax
• Ensure the salary is high enough for national insurance purposes i.e. that it counts as a years ‘stamp’ for your national insurance history to help protect your future entitlement to state pension and other benefits
• The salary is a tax allowable cost for your business therefore corporation tax is saved on the gross salary
• Any additional amounts you withdraw from your company would be treated as dividends which do not attract national insurance, therefore you are not paying any unnecessary national insurance
• Please note that dividends are not a tax allowable expense for your company (unlike a salary), so your company does not save corporation tax on the dividends

Many people choose to limit their total income to the basic tax band so as not to go into the higher tax band (£50,270 for 23/24), to ensure that their income is not taxed at the higher levels of tax, but this will be a personal choice and a balance will need to be made between tax efficiency and how much of the available profits in your business you want to extract.

Next we discuss the optimum levels of salary and dividends for 23/24 if you do wish to follow this plan.

 

What is the optimum level of salary and dividends for 2023/24?

The employment allowance for 2023/24 enables employers to not pay the first £5,000 of employer’s national insurance.

Typically, the employment allowance means that it is more tax efficient to take a gross salary all the way to the tax free personal allowance level (£12,570 for 23/24), however, HMRC over the years have brought in more and more restrictions as to who is entitled to claim the employment allowance – one of which was where they said the employment allowance would not be available to companies where the only person on the payroll is a director, i.e. ‘single director employee’ limited companies.

It seems that HMRC’s intention is to block companies that have no ‘real’ employees from claiming the employment allowance (the government are trying to encourage small businesses to take on employees) – this is clear from the fact that the government have introduced even further restrictions on being able to claim the employment allowance from April 2020.

For single director companies or if you are not certain that you can claim the employment allowance then our preference is to keep things straightforward and lean on the cautious side, so for typical freelancers and contractors we would advise to consider the simpler option – this is the option that we highlight in this article and it means that you don’t need to worry about whether you are correctly claiming the employment allowance or not.

However, we have also highlighted another option at the end of the article.

We have made some key assumptions when preparing these calculations:

• You are a UK resident
• You have no student loan balance
• Your only income is your salary and dividends from your company
• You are not working inside of IR35 – please do read our guidance about the IR35 changes from April 2021.
• You have a standard personal allowance
• Your company has sufficient post tax retained profits to support these dividends

 

Optimum Directors Salary 2023/24

When it comes to tax efficient salary levels for 23/24 there are three national insurance thresholds you need to be aware of:

• Lower Earnings Limit – as long as you pay a salary above this you are protecting your entitlement to future state pension and benefits, without paying any national insurance. For 23/24 this is £533 per month, £6,396 for the year

• Primary Threshold – if you earn above this you personally have to start paying national insurance – For 23/24 this is £1,047 per month, £12,570 for the year

• Secondary Threshold – if you earn above this your business has to start paying national insurance – for 23/24 this is £758 per month, £9,100 for the year

 

You will note from the above that the Secondary Threshold is lower than the Primary Threshold – this means that the optimum level for single director companies is to go up to the Secondary Threshold but not any higher.

Therefore, we suggest you may want to consider a monthly gross salary of £758 which stays just below this threshold and means no national insurance deductions.

With regards to dividends, assuming you wish to take dividends up to the higher tax band but no further, then this would leave you with £41,174 of dividend headroom (£50,270 higher tax band – £9,096 salary).

The personal tax on dividends of £41,174 would total £3,211 – this is calculated as below:

• £3,474 of the dividends are in the tax free personal allowance (£12,570 less £9,096 salary)
• £1,000 of the dividends are in the tax free dividend allowance
• This then leaves the balance of dividends totaling £36,700 to be taxed at 8.75% = £3,211

 

We have presented these figures in both monthly and annual columns below:

 

 

Optimum Directors Salary 2023/24 – alternative option if you can claim the employment allowance

If you are certain that you can claim the employment allowance then you may want to consider this alternative salary / dividend planning of taking a slightly higher salary up to the primary threshold of £12,570 and paying slightly lower dividends.

This would mean a monthly salary of £1,047 and monthly dividends of £3,142.

This is outlined in the table below:

 

 

 

You can see that this results in exactly the same personal cash in pocket as the simpler option highlighted earlier in our article.

However, this option will result in more corporation tax savings because of the higher gross salary.

 

When it comes to the first option we discussed for single director/employee companies, your business could actually save a little extra tax by paying a salary up to the personal allowance of £12,570 but this would then result in your company needing to pay an additional type of tax to HMRC, PAYE, which for many people is a complication they would prefer not to have.

Please note that in order to pay the levels of salary discussed in this article, a payroll scheme must be in place with HMRC and the salary should be reported to HMRC through the payroll system on a monthly basis (known as RTI returns) – if you have an accountant they are likely to be handling this for you, but you should check this if you are not sure.

Finally, please bear in mind that although the tax planning strategy of paying yourself a small salary and then extracting further money from your company as dividends is currently considered relatively low risk, this does not mean that it is risk free from a HMRC challenge.

This article is just general in nature, you will need to make your own decision about how much salary and/or dividend you wish to pay.

We hope you have found this article about optimum salary and dividend levels for the 2023/24 tax year useful.

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