As we enter the new financial year, limited company directors are looking for ways to maximise their tax efficiency. At ESDG Accountancy, our dedicated team has been exploring the optimal salary figures for directors to achieve this goal.
Understanding the Basics
Even for experienced business owners, navigating the tax system can be daunting. In the UK, a director’s salary is subject to taxation, just like any other employee’s salary. However, provided they are shareholders of the company, directors can also draw dividends. Directors must therefore decide what combination of salary and dividend will be most tax efficient. This article seeks to aid directors in making that decision.
The £12,570 Benchmark
The primary threshold in the UK – the amount you can earn before paying employee’s national insurance – is currently set at £12,570 per year. Therefore, paying yourself a salary up this amount is widely regarded as the most tax-efficient strategy for most directors of limited companies.
When a director’s salary exceeds the primary threshold, they start to incur national insurance at 8%. Hence, maintaining a salary at this level seems to be the optimal solution, allowing any further profits to be taken as dividends, which are subject to slightly lower tax rates.
The ESDG Difference
Nevertheless, at ESDG Accountancy, we’ve conducted extensive research that suggests there are scenarios where a higher salary can lead to greater tax savings in the 2024/25 tax year. For example, when company profits before salaries and tax are at £90k, a director could benefit from a salary of £20,000, resulting in savings of £732.78.
Our calculations indicate that at profit levels of £100k and £110k, the ideal salaries could be £25,000 and £27,215.94, respectively, yielding even more significant savings. However, at profit levels of £120k and above, reverting to the £12,570 salary benchmark becomes more efficient once again.
Case Study: Beyond the Personal Allowance
Consider a company with a profit of £110k. Traditional advice would recommend a salary of £12,570. However, our analysis suggests that a salary of £27,215.94 for each director could result in savings of over £1,400. This approach leverages the employment allowance and benefits from the fact that directors’ salaries are deductible for corporation tax.
Who Can Benefit?
This strategy is not for everyone. It is specifically tailored for companies with two directors, such as a husband and wife team, where:
- The company is their sole source of income
- Their personal allowances are not reduced
- They are entitled to the employment allowance but have not used it in full
Holistic Advice
At ESDG, we pride ourselves on offering comprehensive accountancy services that cater to various needs, from personal tax returns to strategic planning for contractors. Our expertise extends to navigating the complexities of property taxation, ensuring our clients are well-informed and equipped to make the best financial decisions.
Tailored Calculations
Understanding that each business is unique, we offer personalised dividend calculations to ensure your salary and dividend mix is as tax-efficient as possible.
Conclusion
Determining the most tax-efficient salary is not a one-size-fits-all situation. It requires a nuanced approach that considers the specific circumstances of your business. At ESDG Accountancy, our goal is to guide you to the best financial outcome.
For more detailed insights into optimising your director’s salary, explore our dedicated post on this subject.
