What is the most tax efficient salary and dividend options in 2022/23

If you run a limited company, then as a director, you need to decide how much to pay yourself. It’s worth planning how you take money out of the company as it’s more tax efficient to pay yourself a salary and a dividend.

As the Government change the income tax thresholds and make changes around National Insurance (NI) then you need to reconsider the split between salary and dividends each year, so you are taking the most tax efficient salary and dividends combination for the tax year.

Why pay a director’s salary and dividends?

As a director of a limited company, you’re classed as an employee of your own limited company. This means that you will pay National Insurance (NI) as an employee if you are above the NI threshold. You’ll pay NI on salary only, so it makes sense to pay yourself a smaller salary and top it up with dividend payments.

Taking a low salary and dividends can save ta

The big question each year as tax rates change and thresholds change is ’How much should I pay myself from my company?’ Also, we’re asked ’What is the most tax efficient salary and dividend options to pay myself?’

To get the most tax efficient balance of salary and dividend you need to consider National Insurance Contributions (NICs) as well. NI contributions will affect things like State Pension and benefits in the future, so you need to bear this in mind, as you may not qualify for these if you don’t pay employee NI.

Income tax personal allowance

Everyone is allowed to earn a certain amount before they will be liable to pay income tax, this is your Income Tax Personal Allowance.

In 2022/23, the tax-free Personal Allowance is £12,570.

Tax on dividends

Dividends are taxed at different rates to your salary and there is are separate dividend tax allowances and thresholds. These are significantly lower than standard rates of income tax on salary. You are allowed to earn a certain amount of tax-free dividend income; this is your dividend allowance.

Dividends are also not subject to NI, so they can be very tax efficient. The tax you pay on dividends will vary depending on how much you pay yourself in dividends during a tax year.

Below are details of the dividend tax rates and dividend allowance for 2022/23:

Tax free dividend allowance is £2,000.

Dividend tax rates are:

Basic rate dividend tax is 8.75%

Higher rate dividend tax is 33.75%

Additional rate dividend tax is 39.35%

Corporation tax and allowable expenses

As a limited company, you pay Corporation Tax on your profits. However, there are certain allowable expenses that will reduce the profit and therefore your Corporation Tax bill as well.

Salaries are an allowable expense, so paying yourself a salary will reduce your profit and save the Corporation Tax your company pays. However, dividends are not an allowable expense. Here’s a comprehensive list of allowable expenses.

National insurance thresholds

You need to understand that there are thresholds for both employers and employees NI and these thresholds are different.

For example, if you decided to pay yourself a salary from the business that exceeds the National Insurance threshold for employer and employee NI, you will have to pay NI as an employee and the company will have to pay employer’s NI as well. This may not be the most tax efficient structure to pay yourself as you’ll be paying National Insurance twice.

Employer and employee National Insurance thresholds 2022/23

Below is a table showing both employer’s national insurance and employees’ national insurance.

There’s a section that needs a table creating (you’ll see it highlighted) – remove the highlighted text and create this table in its place:

NI and it’s effect on benefits and state pension

If you take a salary higher than the Lower Earnings Limit (LEL); £6,396 per year in 2022/23 it will allow you to build up qualifying years for your future State Pension.

If your salary is above the LEL but below the Primary Threshold (£9,880) then you’ll get the benefits of NI, without actually paying it. NI contributions and NI credits can affect your state pension and other benefits such as job seekers allowance in the future.

Your income (salary plus dividends) may also affect your ability to claim Child Benefit - see note below*

Your national insurance history and how many national insurance credits you’ve built up should also be considered.

How much should I pay myself to get the most tax efficient salary and dividend in 2022/23?

Let’s look at three scenarios to work out the most tax efficient options available to you depending on your circumstances:

Scenario 1- If you wish to pay National Insurance Contributions (NICs) or have an additional employee in the company.

You are paying yourself an annual salary of £12,570 and £37,700 per annum (£31,092 for Scottish taxpayers) in dividends.

The amount of personal tax & PAYE on this would be £3,213 per annum leaving you with a net annual take home pay of £47,057.

This equates to a monthly gross salary of £1,047.50 and monthly dividends of £3,141.67.

The main benefit is that if you have more than one employee, due to the employer’s allowance of £5,000, the overall savings will be £380 more than scenario 2.

Scenario 2 - No National Insurance Contributions or the only employee in the company

You are on an annual salary of £9,880 (Apr 22 to Jun 22) and £12,570 (Jul 22 to Mar 23).

Further, you take annual dividends of £38,372.50 per annum.

The amount of personal tax & PAYE payable on this would be £3,545 per annum leaving you with a net annual take home pay of £46,725.

This equates to a monthly gross salary of £823.33 (Apr 22 to Jun 22), £1,047.50 (July 22 to Mar 23) and monthly dividends of £3,197.71.

In this scenario no Employee NICs will be due, but you will pay tax deductible Employer’s NICs of £421.02, because the threshold for employer’s contribution is £9,100 for the tax year. Despite this, your take home pay will be higher than paying yourself a salary of £9,100.

Scenario 3 - Simple alternative to Option 2

You are on an annual salary of £12,570. and taking annual dividends of £37,700.00 per annum.

The amount of personal tax & PAYE payable on this would be £3,735 per annum leaving you with a net annual take home pay of £46,535.

This equates to a monthly gross salary of £1,047.50 and monthly dividends of £3,141.67.

The key benefit here is that you don’t have to change your payroll in July 2022, it would be the same throughout the year. However, this will result in an overall reduction of £43 in take home compared to Scenario 2.

The above scenarios are based on only taking dividends up to the basic rate threshold, any further dividends would be taxed at 33.75% or 39.35%.

*Note re: Child Benefit: The above scenarios assume that you are not receiving Child Benefit. If you are receiving Child Benefit, you will need to ensure that your total income does not exceed £50,000 or you may be subject to High Income Child Benefit Charge. You can reduce your dividends by £270 to avoid the charge.

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If you earn income from other sources such as savings, rental, pensions, other dividend, then seek additional advice.

Summary

There are a lot of considerations when deciding the most tax efficient salary and dividend amount to pay yourself. So,working out your tax efficient director’s salary and dividend split will need thought. Single director companies are slightly different to companies with other directors and employees.

Personal circumstances such as benefits you may need in future, child benefit you claim now, additional income etc. need to be taken into account to give you the optimum salary and dividends for your own circumstances.

To get a bespoke calculation or need further advice on salary and dividends then dns accountants can help. Please contact us today, call us on 03300 886 686 or email us on enquiry@dnsaccountants.co.uk.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.