As of the 2023/24 tax year, there have been adjustments to the tax landscape for directors in the UK. Tax Efficient Director Salary and Dividends remains a crucial strategy to ensure that directors extract income while minimizing tax liabilities. In this article, we will explore key strategies for balancing salaries and dividends to remain within the latest tax thresholds.
Key Tax Rates and Allowances for 2023/24
To optimize your director pay, understanding the tax rates and allowances is vital. The following rates are important to keep in mind:
- Personal Allowance: £12,570 (unchanged).
- Dividend Allowance: £1,000 (reduced from £2,000).
- Basic Rate Band: £12,571 to £37,700.
- Higher Rate Threshold: £50,270.
- Additional Rate Threshold: £125,140.
From April 2023, the dividend tax rates are:
- First £1,000 of dividends: No tax due.
- Dividends within the basic rate band: Taxed at 8.75%.
- Dividends for income above £50,270 but below £150,000: Taxed at 33.75%.
- Dividends for income above £150,000: Taxed at 39.35%.
Salary and Dividend Strategy for Tax-Efficient Pay
To achieve tax-efficient director pay, the most common approach is to combine a modest salary with dividends. For 2023/24, consider this structure:
- Salary: £12,570 (maximizing the personal allowance).
- Dividends: Up to £37,700 to stay within the basic rate band.
This ensures a total income of around £50,270, preventing any higher tax rates from applying.
Example Calculation of Director Pay
Here is an example for a director who takes a salary of £12,570 and dividends of £37,700:
| Income Source | Amount (£) | Tax Rate | Tax Due (£) |
|---|---|---|---|
| Salary | £12,570 | 0% | £0 |
| Dividends | £1,000 | 0% | £0 |
| Dividends | £36,700 | 8.75% | £3,211.25 |
| Total Income | £50,270 | £3,211.25 |
As seen in this example, the total tax liability would be £3,211.25, making this a tax-efficient method for directors.
What to Do When Earnings Exceed £50,270
If a director’s total income exceeds £50,270, it’s essential to understand the tax impact:
- Dividends above this threshold are taxed at 33.75%.
- For total income over £150,000, dividends are taxed at 39.35%.
Conclusion on Tax-Efficient Director Pay
In conclusion, the combination of a salary set at the personal allowance level and dividends up to the basic rate threshold is one of the most effective strategies for tax-efficient director pay in the UK for the 2023/24 tax year. This method minimizes tax liabilities and ensures compliance with National Insurance contributions.
For tailored advice, consider consulting a qualified accountant to adjust the strategy based on your specific financial situation.