A shareholder/director of an owner managed business could receive up to £19,570 tax free in the 2023/24 tax year and up to £19,070 tax free in 2024/25 if structured appropriately and depending on the individual's circumstances and other income. This can be achieved through a combination of low salary, high interest and dividends and could equate to tax free income of up to £39,140 for couples.
The personal allowance is currently £12,570 and is expected to be frozen at this level until April 2028. A director’s annual salary is often set below this amount, at the threshold at which no employer’s national insurance contributions (NIC) will be payable (currently £9,100). Given that corporation tax rates are higher than the NIC rate of 13.8%, however, the NIC liability of taking the additional salary up to the NIC secondary threshold (£12,570) should be outweighed by the corresponding CT deduction (at 19% or higher).
In some cases, the company may also be able to utilise the employment allowance, increasing the benefit further of taking the additional salary with no NIC liability, as well as a deduction for corporation tax (versus dividends which are not tax deductible).
However, as mentioned, each individual’s circumstances need to be carefully considered and, where the individual has a directors loan account in credit, a basic salary payment of £758 per month (£9,100 per annum) for 2023/24 and 2024/25 is likely to still be the best approach. This salary will ensure that NICs will not be payable by the director or the company, whilst ensuring that the director will still receive credit towards their state pension for the relevant tax year.
For 2023/24 and 2024/25, the personal savings allowance is still available which means that the first £1,000 (basic rate taxpayers) or £500 (higher rate taxpayers) of interest received will be tax free in each year.
In addition to this, for individuals who receive only investment income in excess of the personal allowance (£12,570), the first £5,000 of interest will be subject to the starting savings rate of 0%.
If an individual does not currently receive enough interest from other sources and has loaned money to the company, you may want to consider paying interest at a commercial rate on the loan in order to fully utilise these allowances. Furthermore, as interest is deductible for corporation tax purposes, interest on a director’s loan account should be paid in preference to dividends, as the net position will be preferential.
One point to note is that the company would need to deduct basic rate tax from the interest payments and submit a form CT61 to HMRC.
The dividend rates for both 2023/24 and 2024/25 are:
Dividend tax rate
£1 - £37,700
£37,701 - £125,140
The current tax free dividend allowance of £1,000 is set to reduce to £500 from April 2024. Any additional dividends are taxed as the top-slice of income, so the tax bands that dividends fall within will be affected by other income; if income exceeds £100,000 the personal allowance is restricted by £1 for every £2 of income above £100,000.
Payment of dividends is a standard way for a company to distribute its profits amongst its shareholders but there are a number of rules which apply to the payment of dividends which should be highlighted including:
- Dividends can only be paid where there are sufficient reserves within the company.
- Dividends must be paid in accordance with the rights pertaining to the individual’s shares. If two shareholders hold the same type of share, then they are both entitled to the same amount of dividend per share. You cannot pay different amounts of dividends on the same class of share.
- The effective date of a dividend for tax purposes is the date on which payment becomes unconditional which is for:
- Interim dividends – the date the company pays the dividend (this could be physical payment or a credit to the DLA).
- Final dividends – the date of the shareholder resolution to approve the dividend (normally just before the accounts are finalised).
- Payment of dividends must be noted in the minutes of the relevant board meeting.
- Dividend vouchers must be produced prior to 6 April and provided to shareholders documenting each dividend payment.
In addition to the above, as the standard rate of corporation tax increased to 25% from April 2023, in some cases it may now be more tax efficient for directors to be remunerated by full salary and only utilising the dividend allowance rather than taking a small salary, with the majority of their remuneration as dividends.
Some examples of scenarios where a higher salary or bonus should be modelled and considered instead of dividends include:
- Where the director is likely to receive remuneration in excess of £550,000 for the tax year.
- Where the company is eligible for R&D tax relief and a proportion of the director’s salary costs could potentially be claimed for enhanced relief.
- An employee of the company on a higher base salary that also holds some shares in the company.
Please contact the team should you have any further questions on remuneration planning.