As a business owner, determining the ideal profit extraction for company directors can be tricky. Often, most directors will want to balance their salary and dividend payments to be as tax efficient as possible.
The 2023/24 tax year presents an array of factors to consider and striking the right balance will depend upon how profitable your business is, your target income and your wider tax affairs.
Remuneration vs. Dividends – What’s the difference?
Remuneration is a payment that is subject to income tax and National Insurance Contributions (NICs). Dividends are typically paid to shareholders out of post-tax profits and are subject to income tax only.
The tax-free personal allowance
The tax-free personal allowance for the 2023/24 tax year is £12,570. By keeping your salary below this threshold, you can avoid paying any PAYE income tax.
National Insurance considerations
Salaries not exceeding £758 per month will not incur National Insurance charges, but your company will be required to pay 13.8 per cent in Employers’ NICs on salaries exceeding £9,100 per year.
However, the Employment Allowance allows eligible businesses to reclaim up to £5,000 in Employers’ NICs.
To benefit from this, directors must earn at least £9,100, although this does not apply to sole directors without other employees.
You will also need to pay National Insurance personally, if your salary is above the Primary Threshold (£12,570 for 2023/24). The rate is 12 per cent between £12,570 and £50,270, and 2 per cent thereafter.
Pension and minimum wage concerns
You can extract profit in the form of employer pension contributions, but the main drawback of this is that you can’t access your pension until the age of 55.
To secure your entitlement to future state pension and benefits, without paying National Insurance, ensure that your remuneration is above the Lower Earnings Limit (£6,396 for 2023/24).
Minimum wage rarely applies to directors as they do not have a contract of employment.
Corporation Tax – how does this change things?
The increase in the rate of Corporation Tax from April 2023 may require you to reassess your balance of remuneration and dividends, when you consider that remuneration is a deductible expense for tax purposes whereas dividends are a post-corporation tax extraction.
Dividends as income
As they are paid post-corporation tax, dividends attract lower rates of income tax and are not subject to NICs and can be a tax-efficient means of extracting money from your business, but only if you have profits available in the first instance.
You should note that in 2023/24, the tax-free dividend allowance has been halved from £2,000 to £1,000. Beyond that, dividends are taxed as follows:
- Basic tax rate – 8.75 per cent
- Higher tax rate – 33.75 per cent.
- Additional tax rate (now above £125,140) – 39.35 per cent
Extracting dividends requires you to declare profits and account for dividends in good time, something your accountant should be able to support you with.
HMRC is increasing checks to ensure dividend payments are accurately recorded. To satisfy HMRC and Company law requirements, directors should consider company reserves, cash flow, personal tax situations, and director requirements when determining dividend amounts.
Additionally, directors should hold meetings to decide on dividend amounts and methods of payment, and record minutes to maintain accurate documentation.
How can George Hay help?
When it comes to balancing remuneration and dividends, there is no single solution to suit every owner-manager, and what is right for you can only be decided with a robust understanding of your circumstances.
To talk to one of our experienced advisers about extracting funds from your company in a tax-efficient manner, contact us today.