NOW UPDATED FOR 2023/24
You would be forgiven for thinking that, given all the tax changes that have happened in the year, including the change in corporation tax rate coming into effect for 2023/24, that there would be more in the way of changes for dividend vs salary.
Well here at The Accounting Studio, we have spend a not inconsiderable amount of time crunching the numbers, running over 2000 scenarios and poring over the data, only to find that the recommendations from last year, pretty much hold for this year as well.
One of the most fundamental ways for company owners to manage (minimise!) their tax liability is by making sure they are using the most appropriate split between dividend vs salary 2023/24.
There are a myriad of ways that this can be done and each individual will need to take into account their particular personal taxation circumstances. Sometimes what appears to be the most tax efficient way to extract funds stands in stark contrast with another personal objective – usually getting a mortgage. So before diving in and ruthlessly efficiently managing your tax liability, pause for thought about what other impacts this might have. Talk to a mortgage advisor if necessary to find out what income, and of what type, you may need in order to secure that mortgage that will buy you that dream (or maybe first) property.
Assuming that paying as little tax as is legal is the aim of the game – read on…
First – a bit of background on the two items
What is a dividend
We’ve written more on this in our guide to dividends, but to save you the effort of clicking on the link and reading this splendid exposition the short version is that it is
- The payment of profits to shareholders (note that’s shareholders, not directors)
- You can only pay dividends if you have profits to pay out (bare in mind this is after corporation tax – don’t forget to account for that)
- Normally paid in proportion to the shares held (so if there are two shareholders, “Barry” owning 70% and “Cecily” owning 30% and you pay a £10k dividend, Barry should receive £7k and Cecily should receive £3k
- They need to be approved and declared correctly
- Dividends are paid after corporation tax, meaning they are not themselves a tax deductible expense.
- If there are insufficient profits then it the money you pay out would likely be classed as a director’s loan that you would have to repay, and on which all sorts of tax complications arise
- Dividends have a lower income tax rate than salary and are not subject to national insurance contributions
What is salary
Sounds stupid, right? But let me be clear as this has caught out more businesses that I’ve come across that it has any reason to:
Salary is money paid that has been processed through PAYE and reported to HMRC. If you’ve not reported it through PAYE it’s not salary – OK!
What that means is registering the company as an employer and making monthly “Real-time-information” (RTI) submissions using payroll software.
Usually there are a few aims
- Take as much salary as possible without paying income tax. This is because it is a tax deductible expense.
- Avoid having to pay employers national insurance contributions, so long as that is beneficial
- Have the salary set so that it counts towards your national insurance record, hence protecting your rights to state benefits (such as state pension)
Changes this year
The key change for companies is the change in rate of corporation tax from 19% to 25%. The change is very complex, but the simple version is this:
Assuming you have no associated companies (more on this later), your company will be taxed as follows, and your company is not receiving any dividend income from non-group companies:
- Profits up to £50k are taxed at 19%.
- Profits between £50k and £250k are taxed at a marginal rate of 26.5%
- Profits above £250k are taxed at 25%
The net effect of this, particularly the middle band, is that by the time you are generating £250k in profits, your whole profit will be being taxed at 25%.
This is only in effect from 1st April 2023. So if your year end is, say, June 2023 this whole arrangement (for this year only) will adjusted so that 3/12ths of your profits will taxed under this new regime, but the bands will then also be adjusted to 3/12ths.
So for your first year it will only partly affect your tax, then in future years it will apply for the whole year going forward.
Complex you say? Yes, says I!
But we haven’t even got started…
There are a range of extremely complicated rules that come along with this that change the band thresholds based on a number of different circumstances.
In effect the Small Companies Rate band is shared between the associated companies.
The same is true of the main rate band of £250,000.
For this reason it is an essential requirement that we correctly identify all your associated companies. The legislation casts the net very wide.
Associated companies are any companies where one is controlled by another, or both are controlled by one, or a number of individuals or companies.
Associates also takes into account your family’s businesses where there is also “substantial commercial interdependence“, which is a whole other level of complexity, but could mean that because you loaned some money to your children’s/parent’s/brother’s/sister’s company, or you have customers in common with them, your tax rate may change.
The rules are somewhat berserk, but they still exist, and therefore need to be treated with the sort of respect you give when stumbling across a hungry bear in the forest: You don’t have to like it, but you do need to acknowledge that its there, and if you make a wrong move, it might just rip your head off.
Dividend tax rates
Last year the rate at which dividends went up in line with National Insurance to pay for the Health and Social Care bill. Without rehashing all the excitement that happened this year with taxes and budgets, the final outcome is that the 1.25% increase on National Insurance has now been reversed, but the increase on dividends still remains.
Dividend tax rates remain therefore the same as 2022/23
There is also a band change that needs to be considered for individuals. The threshold at which the additional rate of tax applies has been reduced from £150k to £125,140
|£12571 to £50270
|£12571 to £50270
|£50271 to £125,140
|£50271 to £150,000
In the 2022/23 you would be eligible to receive £2,000 of dividends at nil tax. This is being reduced in 2023/24 to £1,000
Optimal Salary 2023/24
Despite all the changes and complications of the change in corporation tax, I have run the numbers (over 2000 scenarios), and the conclusion I have drawn is that the recommendations in terms of salary for this year actually remains the same as in the previous year, and the same three options available to you last year are the same options this year (I was expecting something different but the calculations prove otherwise).
So the optimal salary, as we have crunched the number, for most directors who are taking both a salary and dividends, is……
£11,908 per annum
£993.44 per month
At this level you will be paying employers national insurance and this is why we are urging caution to clients who have not historically paid this.
You will need to remember to actually pay it.
It will not take much in the way of fines to nullify the tax savings you make at this level – so if you are organised and trust yourself to be on top of your admin, you should be fine. If you are already running a payroll and making regular payments to HMRC, again you should be fine.
But for those single director companies who don’t have this monthly process currently, it could be an issue.
If you are perhaps a bit more, err, free spirited (?!), the next option is what we are recommending
Safest Dividend vs Salary 2023/2024
If you are not 100% certain that you will be able to make sure that the correct payments get made to HMRC for payroll on time, every time, you should consider this option:
You should look to be paying yourself £758.33 per month in salary. At this level you will be contributing to your state pension but not actually paying any income tax or national insurance. You also won’t have to (normally) make payments over to HMRC at regular intervals, and so is administratively far less of a burden, and far less likely to incur fines as a result.
Optimal Dividend vs salary 2023/24
Due to the enhance complexity in the tax system at the moment, rather than give you single figure for what your tax efficient dividends would be this year, I need to give you a method for working it out yourself.
The most tax efficient dividends you take throughout the year will depend on a few things:
- Your salary (see above)
- Your residential property income
- Your other taxable income
- Whether you, or your partner, receives child benefit
Here is the rule of thumb for you
- Work out your higher rate threshold
- If you or your partner are receiving child benefit, and your partner earns less than £50,000, your higher rate threshold is £50,000
- If you or your partner are not receiving child benefit, your higher rate threshold is £50,270
- Deduct from this the total salary you will receive in the year (see above)
- Deduct from this the expected profit from residential properties in the year EXCLUDING mortgage interest
- Deduct other expected income in the year (e.g. other salaries, benefits in kind received, income from self-employment, interest, other dividends, other property income etc)
If the figure is still positive, this is the most tax efficient dividend you can take.
Obviously, the normal rules apply for dividends – they are paid out of post corporation tax profits and need to be properly authorised (profit assessment/board minutes/dividend vouchers etc). You need to have sufficient profits in the business to be able to pay these dividends. If you don’t have sufficient profits, it will be treated as a director’s loan which has lots of complicated tax consequences.
So the advice for dividend vs salary 2023/24 this year is a bit more complicated than in previous years. Obviously, the above is meant to inform you rather than provide you with specific advice personal to your own circumstances.
If you feel like you need a more tailored approach we would be delighted to have a chat with you to find out how we could help. Tax really is quite complicated, and is getting more so. Don’t rely on what is generic information above – talk to a professional to make sure you are making the right decision when it comes to extracting profit from your business in a tax efficient way and working out what the most effective dividend vs salary 2023/24 for you.