Tax efficient ways to pay yourself as a director in 2024

 

Managing your income becomes uniquely advantageous when you run your own limited company, giving you flexibility in both payment methods and timing. This adaptability extends to tax-efficient choices such as opting for a director’s salary through PAYE, receiving periodic shareholder dividends, and utilising directors’ loans, business-related expenses, allowances, and tax reliefs.

 

Structuring Payments in a UK Limited Company

As a director and shareholder, various options exist for extracting funds from your business:

Director’s Salary:

Subject to PAYE, it parallels the taxation of an employee’s wages, with Income Tax and National Insurance contributions applicable at rates dependent on your earnings.

 

Dividend Payments:

Typically taken in addition to a director’s salary, dividends provide a tax-efficient method of income receipt. They are exempt from Income Tax and National Insurance, with tax rates contingent on your Income Tax bracket.

 

Director’s Loan:

Involving borrowing from your company, recorded in a ‘director’s loan account,’ this option allows short-term tax-free borrowing. However, overdrawing may result in ‘section 455’ tax if not repaid within nine months after the financial year-end.

 

Reimbursement of Allowable Expenses:

Business-related expenses, encompassing pension contributions, office equipment, training costs, and more, contribute to a tax-efficient remuneration package.

 

Tax Considerations

 

Taxes on Director’s Salary

A director’s salary is subject to Income Tax and National Insurance contributions through the PAYE system. Understanding the tax bands, allowances, and implications is crucial for effective financial planning.

 

Income Tax Rates:

Basic Rate (20%): £12,571 to £50,270

Higher Rate (40%): £50,271 to £125,140

Additional Rate (45%): Over £125,140

 

National Insurance Contributions:

Employee NIC: 12% on earnings above £12,570 up to £50,270, reducing to 2% beyond.

Employer’s NIC: 13.8% on salary income above £9,100.

 

Taxes on Dividends

Directors often receive dividends in addition to their salary, benefiting from lower tax rates. Understanding dividend tax rates, allowances, and reporting obligations is crucial.

 

Dividend Tax Rates (2023-24):

Basic Rate (8.75%): £12,571 to £50,270

Higher Rate (33.75%): £50,271 to £125,140

Additional Rate (39.35%): Over £125,140

 

Annual Dividend Allowance: £1,000 (tax-free)

 

Tax-Efficient Approach

For optimal tax efficiency, consider a combination of a director’s salary (up to the Personal Allowance limit) and dividends. Additional considerations include claiming expenses, using allowances and tax reliefs, and strategically employing director’s loans when necessary.

 

Step 1 – Director’s Salary

 

Multiple Directors or Employees:

Annual salary: £12,570 to maximise Personal Allowance.

Employment Allowance can offset employer’s NIC.

Sole Director, No Employees:

Annual salary: Up to £9,100 (to avoid NIC), or up to £12,570 (considering no Employment Allowance).

 

Step 2 – Dividend Payments

 

Optimal Method:

Majority of income as dividends for tax efficiency.

Consider leaving some profit as distributable reserves for future dividends.

 

Step 3 – Expenses, Loans, Pensions, etc.

 

Expenses and Benefits:

Claimable business-related expenses to reduce tax liability.

Consider pension contributions, training costs, and other allowable benefits.

 

Directors’ Loans:

Use cautiously, ensuring timely repayments to avoid ‘section 455’ tax.

Consider interest implications for loans exceeding £10,000.

 

Pensions:

Tax-efficient method to extract profits.

Annual allowance for tax-free pension contributions: £60,000.

 

Employment Allowance:

Limited companies meeting criteria can reduce employer’s NIC by up to £5,000 per tax year.

 

 

Conclusion

Effectively navigating the intricacies of paying yourself as a director in 2024 demands thoughtful consideration of tax implications. Do you want to ensure you pay yourself in the most tax efficient way possible? Reach out to us at AO Accountants. Our experienced professionals can guide you through your income structure, ensuring the best outcome for you and your creative company.