Unlike a sole trader or partnership, where you are taxed personally on your profits each year, as a shareholder you have more flexibility to decide the level of profits that you take each year as remuneration.
In this article, we will explore the most tax-efficient ways for directors to remunerate themselves in the 2024/25 financial year.
Salary As Directors of a company, you take a salary through the payroll, in the same way that you would pay your employees. This can become a very costly form of remuneration however, as you will personally pay both Income Tax and National Insurance, and the company will also be required to pay National Insurance.
Dividends A tax-efficient option that directors often use to remunerate themselves is via the combination of a basic salary and dividends. Dividends are a distribution of the after-tax profits made by the company/ Whilst Income Tax is payable on the dividends received, the rates are significantly lower than the Income Tax rates for a salary, and there is also no National Insurance charge to be paid on dividends. By taking dividends, you will also be able to take advantage of the tax-free Dividend Allowance – currently £500 per tax year.
Other income It also may be beneficial to consider utilising other income methods, such as charging rent on a commercial property or charging licence fees. These need to be carefully considered, and balanced with the other tax implications that can arise.
Why do I need to keep my accountant informed?
If you plan to change your pay structure, change the benefits you receive from your company, or expect to receive income from a different source, then do make sure you run your plans past your accountant. Decisions like this without professional advice can cost a lot in tax, particularly if extra income/benefits put you into a higher rate tax bracket or mean that you lose your Personal Allowance. Also, if you claim Child Benefit, extra unplanned income could mean incurring the High-Income Child Benefit Charge.
In conclusion, understanding the most tax-efficient ways to pay yourself as a limited company director is essential. By considering the options of salary, dividends, and other income such as rent/licence fees you can ensure that you are paying yourself in the most tax-efficient way possible.
Get in touch
Tax affairs are complicated and we would always advise you to speak with your advisers before making any changes. For more information on how we can help you and your business please contact us at info@oldfieldadvisory.com or call 02476673160.
Please note: This article is provided for information only and was correct as at time of writing (11/04/24). Any lists and details provided above are not exhaustive and are not intended to be full and complete guidance. No action should be taken without consulting detailed legislation or seeking independent professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted.
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