In micro businesses, shareholders and directors are often the same people. Shareholders own the company through shareholding and appoint directors to manage the company. A salary is paid to directors for their duties, and dividends are paid to shareholders from post-tax distributed profits.
Taxation of Salary and Dividends in 2023/24
The personal allowance remains at £12,570, and the higher tax band is unchanged at £50,270. The dividend allowance is reduced to £1,000. Dividends above the basic tax band are taxed at 33.75%, and those in the upper tax band are taxed at 39.35%.
Tax Efficient Salary and Dividend Strategy for 2023/24
The typical tax planning strategy is taking a low salary and extracting income as dividends. The salary should not exceed the personal allowance and be high enough for national insurance purposes. Dividends do not attract national insurance and are not tax-allowable expenses for the company.
Optimal Salary and Dividend Levels for 2023/24
- The employment allowance allows employers to avoid the first £5,000 of employer’s national insurance. For single-director companies, the preferred option is :A monthly gross salary of £758, just below the secondary threshold. This avoids national insurance deductions.
- Dividends can be taken up to the higher tax band, leaving an annual £41,174 of dividend headroom.
Alternative Option with Employment Allowance
If the employment allowance can be claimed, consider a higher salary of £12,564 and lower annual dividends of £37,706. This results in the same personal cash as the simpler option but with more corporation tax savings. Though the savings are minor.
A payroll scheme with HMRC is necessary to pay the discussed salary levels, and a small salary and dividend extraction strategy is relatively low-risk. However, it is not risk-free from an HMRC challenge. Consult a professional before taking any action.
Your Business Partner
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As fully chartered, certified accountants led by an MBA graduate, we possess the knowledge and expertise to serve as the trusted advisers you need to ensure your company’s success.
Let Southside Accountants Wimbledon be your guide and partner on your journey to success. Reach out to us today to see how we can make a difference in your business’s financial future.
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