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The ever-evolving tax landscape means that navigating the optimal mix of salary and dividends for company owners has become much more complex. There are numerous different factors that need to be considered when determining the right mix for you and your company. Some of the key changes include:

  • The increase in the main rate of corporation tax to 25% on profits of £250,000 or more and the reintroduction of the marginal rate resulting in profits between £50,001 and £249,999 being taxed at an effective rate of 26.5%. Profits of £50,000 or less will still be taxed at 19%.
  • Another reduction in the dividend allowance from £1,000 to £500.
  • The reduction in employee’s national insurance from 12% to 8%.
  • The reduction in the threshold at which individuals pay additional rate tax from £150,000 to £125,140.

Historically, dividends have been tax efficient as they effectively sidestep National Insurance Contributions for both Employees’ and Employers’. However, dividends can only be distributed from post-tax profits i.e. profits which corporation tax has already been paid on.

Salaries, being deductible expenses for companies, lower the taxable profits and consequently the corporation tax liability. A modest salary (typically between £9,100 and £12,570) can be untaxed on the director (depending on their other income) as it utilises their personal allowance. It also ensures a qualifying year for state pension purposes. Amounts above £9,100 incur Employer’s National Insurance at 13.8% and are typically not tax efficient (depending on the availability of the Employment Allowance).

The right mix of salary and dividends will depend on various factors, including, but not limited to, the level of profit in the company and consequently the rate at which the company pays corporation tax, an individuals target income, an individuals other income and any other directors and shareholders of the company.

If your business typically declares profits below £50,000, maintaining a maximum salary of £9,100 for a single director, or £12,570 per director for multiple directors eligible for employer’s allowance, remains the most tax-efficient approach for the 2024/25 tax year.

Should profits exceed £50,000 and you haven’t utilised all your employer’s allowance (EA), it may be worthwhile considering raising director salaries until either your company profits diminish to £50k or you’ve exhausted your full £5,000 EA.

Tax planning for 2024/25 is a moving target and may necessitate fine-tuning to maximise financial efficiency as year-end approaches. Given the huge number of variables involved in these calculations for 2024/25, it is advisable to get in touch with us to review your specific circumstances.

CB Reid have the expertise and experience to offer advice on the most tax efficient way to pay yourselves. Please make contact with our team for further help.