It’s that time of the year and would like to share with you our thoughts around the most tax efficient way to pay a Director Shareholder in 2024 / 25?

The most efficient way to remunerate a shareholder director is to take a combination of both  salary and dividend. However, there is not really an all size fit all scenario!

When looking at the level of salary / dividend split its alway’s good to consider a few things:

• Personal Allowance
• NI Secondary and Primary Thresholds
• Do you have enough distributable profits?
• Timing in taking dividends
• Employer Pension Contributions
• Tax free dividend allowance has reduced from £1000 to £500

The personal allowance remains at £12,570 and a great saving on income tax when planning your salary / dividend combination. You just need to consider that if you receive income from other sources, this will count towards your allowance.

As you have seen in the spring budget NI has reduced and will have a positive impact at a family level across the country.

When planning your remuneration for the next tax year please ensure you consider your company cashflow. If you are in a situation where cash is low but with a good forecasted revenue stream then timing your dividend distributions to accommodate any immediate cash type responsibilities would be prudent.

Except for the latter, timing your dividends and spreading it over a few years can also help you reduce your personal income tax by staying within the lower tax band. For info 2024/25 will remain at £50,270.

Another way to reduce your corporation tax is by doing by Employer Pension Contributions which will reduce your corporation tax with no benefit in kind impact. However, ensure you seek professional advise to ensure you invest where there is the best return on investment.

With the above in mind and considering NI. If you take a salary above the lower earnings limit of £6,396 (2024/25) per year but below the primary threshold of £12,570 (2024/25)  then you as director will still accrue all the benefits of National Insurance, without actually paying for it.

Taking it all into account you have two good options but as mentioned your circumstances might be different and a 3^rd option might have to be explored:

Option 1:

Take a salary up to your tax free personal allowance of £12,570, and £37,700 in dividends – This means you remain below the £50,270 tax band and will have a tax liability of £3,255 (Calculation: £37,700 – £500 tax free dividend allowance x 8.75% dividend tax). With this option you will have a small employers NI to pay as you fall within the Primary Threshold. You will not be liable though for any Employee NI.

 Option 2:

Take a salary of £9,100 per annum with the remaining balance of £41,170 in dividends to stay within the lower tax band. Your income tax liability will be £3,255 (Calculation: £41,170 – £3,470 of personal allowance left when considering the £9,100 salary less £500 tax free dividend allowance x 8.75%) This option will also bring you below the employee NI threshold and therefore no NI to pay.

Where there is 2 or more directors the best salary would be £12,570 as you will be able to claim employment allowance which will effectively mitigate the employers NI you will need to pay with a small saving.

If we look after your payroll we will reach out individually to discuss and put it all in place for you.