Most tax effective director’s salary and dividends for 2024/25
As the 2024 Spring Budget has confirmed the changes for the new tax year we’ll cover the most tax effective director’s salary and dividends for 2024/25. Therefore this post wili interest you if you're a small limited company. If you're looking for the relevant details for the current tax year (2023/24) you can find the information here.
Tax rates and allowances for the 2024/25 tax year
Below is the position for taxpayers in England, Northern Ireland and Wales for the new tax year starting on 6th April 2024:
The income tax rates are slightly different for Scottish taxpayers as you can see here.
Overview - Most tax effective director's salary and dividends for 2024/25
For most director/shareholders, paying a modest salary and taking the balance as a dividend is the most tax effective way of extracting limited company profits. Furthermore, there are numerous benefits:
The most tax effective director's salary and dividends for 2024/25
In the examples below, we've assumed you're UK tax resident, your not caught by IR35, your only income is salary and dividends. Additionally, you have no outstanding student loans. Lastly, we've made the assumption that you have sufficient post corporation tax profits to pay yourself dividends.
Option 1
This first option is preferable if claiming the employment allowance. For example, where you have another employee or a family member working in your business.
Paying a salary of up to £12,570 per annum or £1,047.50 per month means paying dividends of £37.700.
As a result, pay dividends of £37,700, means a personal income tax liability of £3,255 shown below:
Therefore choosing to pay the higher salary of £12,570 means a greater corporation tax saving. This is because salary is tax deductible for the company. Whereas dividends are not. This might be a more attractive as corporation tax rates have increased.
Option 2
This alternative assumes you can't claim the employment allowance because you are the sole director. If that's the case, a salary up to the Employer’s National Insurance Threshold is paid.
For the 2024/25 tax year this is £758 a month or £9,096 per annum. This threshold is lower than the Employee's National Insurance threshold which amounts to £12.570 per annum.
As a result, dividends of £41,174 are paid without paying any higher rate tax (basic rate band of £50,270 less salary of £9,096).
Therefore, taking this amount as dividends, you'll have a tax liability of £3,255 detailed below:
Alternative company profit extraction
There is no 'one size fits all approach'. Therefore you could consider the following:
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.