The most tax-efficient limited company director’s salary for 2023/24

As we head into a new tax year we’ve been doing our homework in the background as usual to come up with the best strategy for directors’ salaries.

We work on the basis of making the most of your tax allowance and taking account of things like changes in the dividend allowance and impact on National Insurance to arrive at our recommendation.

Our salary strategy for 2023/24

Claire has considered lots of options and settled on an annual salary of 12,570 a year, or £1,047.50 a month for most directors.

If you have benefits like private medical, a company car any other income (say from rental properties) your salary will be £9,096 a year or £758 a month.

Paying this salary in place of dividends saves anything from £2,388 to £3,331 in Corporation Tax (depending on the rate you pay), because salary is allowed as an expense against profit and dividends aren’t.

For most of our clients this is a notional exercise with the salary recorded in your accounts and our team working the magic on your drawings in the background to allocate the right amounts to salary and dividends at the right times, depending on how much you take out of the company each year.

The impact on National Insurance

At these salary levels all directors will meet the minimum threshold for NI but won’t actually need to make a payment. You won’t need to pay any personal tax on your salary either (although you will have some personal tax to pay on dividends if you take them).

Your company will have an NI payment to pay – employer’s National Insurance Contribution. This will be £478.86 for a company with one director, with the amount rising depending on how many people you employ. If you have two or more directors or employees on payroll you’ll get the Employment Allowance, which means you won’t have to pay some of the NI.

If you have a company NI liability, we’re moving to clients paying this by direct debit so they aren’t overlooked. According to HMRC’s schedule, payments will be due in January, February, March and April 2024.

• Due 19th Jan £45.19
• Due 19th Feb £144.56
• Due 19th March £144.56
• Due 19th April £144.56

Total £478.86

 Why the change?

With a much-reduced dividend allowance it’s cheaper to pay the extra NI contributions on £12,750 than pay the tax on extra dividends.

The extra employer’s NI amounts to £478 (13.8% of £3,470) but the corporation tax saved is at least £750 (19% of £3,470 + 19% of £478).

The corporation tax saved increases to £1,046 if you pay the 26.5% higher tax rate (calculation is 26.5% of £3,470 + 26.5% of £478).

When can you claim the employment allowance?

There’s a £5,000 employment allowance for employers, which reduces the NI liability by this amount. It’s only available to companies with multiple directors or employees, so isn’t available to one-person companies.

If your company is eligible for the employment allowance you won’t need to pay the £478 in NI contributions, which increases the tax efficiency of the £12,570 salary.

The optimum salary for a sole director in 2023/24

If there’s just you taking a salary from your limited company, it’s still worth you taking £12,570 even though you will have to pay the £478 NI contribution. This is because the Corporation Tax saving on putting the salary through as an expense is at least £750.

Why not pay higher salaries?

All taxpayers have personal allowances with which they can earn tax-free income. As soon as these allowances are used up, tax rates are applied.

When income exceeds £12,570 per annum, both national insurance taxes and income tax are applied.

The NI and income tax rates combined are higher than the dividend tax rate. Even when accounting for the corporation tax reduction on the salaries, paying dividends is still more tax efficient.  Unless you have another reason to pay a higher salary, for example R & D tax credits.

What do I need to do?

We’ll automatically adjust your salary in April’s payroll so there’s no action for you to take unless there’s a reason you want to take a different amount as salary.

We’ll be in touch nearer the time about setting up an direct debits to pay employer’s NI contributions ahead of the first payment in January 2024.

Still got questions about 2023/24 tax strategy?

Give your friendly TLC contact a call and we’ll do our best to talk you through your situation.