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A look at the most tax-efficient options
When you run a limited company, you can pay yourself with a salary or take an income in the form of dividends – or a mixture of both. We reveal the most tax-efficient options for business owners to take drawings from the business – but if your finances are complicated you should always seek professional advice
What salary can you pay yourself without incurring tax?
The following calculations are based on rates and thresholds in England, Wales and Northern Ireland for the tax year 2023/24. Different income tax rates apply in Scotland.
From 6 April 2023 to 5 April 2024 you can pay a total of £12,570 (£241.73 per week) without attracting any personal income tax or employee’s National Insurance. The company will pay employers NI contributions at 13.8% on salary over £9,100, but it saves corporation tax on the whole salary (including employers NI).
At this level of salary, you get National Insurance Credits towards some benefits eg state pension. You will have to comply with certain rules and regulations:
- You must be registered with HMRC as an employer.
- You must file RTI (real time information) returns each pay period. Fines will be imposed for the late filing of a return.
- You must abide by National Minimum Wage regulations
How much tax will you pay on dividends?
The tax-free dividend allowance was introduced in April 2016. The allowance for 2023/24 is £1,000. Any dividends in excess of this allowance attract dividend tax. The rate of dividend tax depends on your total income.
Dividends now attract tax at the following rates:
- The first £1,000 of dividends is tax-free
- Dividends falling within the basic rate tax will be taxed at 8.75%
- Dividends falling within higher rate tax (£50,270 for 2023/24) are taxed at 33.75%
- Dividends falling within the additional rate of tax are taxed at 39.35%.
- For incomes above £100,000 your personal allowance starts to get restricted and therefore the dividend rate bands change.
Dividend tax calculation example for 2023/24
- Assume you have the standard personal tax allowance (£12,570).
- Assume you want an income of £50,000 from your business and have no other sources of income.
- You pay a salary from your company of £12,570 on which there is no tax or NI.
- You also pay yourself £1,000 in tax-free dividends.
- The remaining amount to make your salary up to £50,000 (£36,430) would be taxed at 8.75% giving you a total tax bill of £3,187.62.
The total tax-free amount is £13,570 (£12,570 salary plus £1,000 dividends).
Note: this is per person (you could consider a spouse taking an income or some dividends from the business, especially if they do not work elsewhere, but always get advice from an accountant first).
Higher rates of tax
If you want to take an income over £50,271, dividend income will attract a higher tax rate (33.75%. And if your income exceeds £100,000 your personal allowance will be restricted. You should then take further advice.
What tax is payable if all the income was taken as salary?
If you were to take all £50,000 as salary, the tax calculation would be very different.
You would pay much more income tax and also significant employees National Insurance contributions:
- income tax of £7,846 (£12,570 tax free, then 20% on £37,430);
- employees NI of £4,491.60 (12% on income between £12,570 and £50,000).
However, the company would pay less tax. Although the company will pay employers NI contributions at 13.8% on salary over £9,100, the company saves corporation tax on the whole salary (including employers NI). The company’s total tax contribution falls – but by much less than the increase in your personal taxes.
The overall effect is to dramatically increase your total tax bill (taking into account income tax, corporation tax and NI contributions).
How to pay dividend tax on dividends
Unless you are already required to submit a tax self-assessment return, you do not need to do so just for dividends below £10,000. You can pay the tax due by contacting HMRC and asking for a change to your tax code. You don’t need to do anything if your dividends are within your dividend allowance.
If you already submit a self-assessment tax return, or if your dividends are above £10,000, simply enter the dividend amount on your self-assessment tax return.
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Download ACCA’s latest tax rates and allowances tables from our Budget Hub.