Business owners have two main options in deciding on their remuneration: salary or dividend?
Salaries are generally fixed amounts and subject to income tax and employer and employee National Insurance contributions (NICs) with any additional amounts taken as bonuses which are also subject to income tax and NICs. Salaries and bonuses are processed through the company’s payroll and liable to PAYE. Salaries, bonuses and the associated employer NIC liabilities are deductible in calculating the company’s profits chargeable to corporation tax. In contrast, dividends are payments to shareholders out of the company’s profits after tax and are not deductible in calculating the company’s taxable profits. Dividends are investment income and are subject to income tax but not NICs.
For many years, declaring dividends was more tax-efficient than taking salary and bonus, but changes to corporation tax rates, the reduction of the 0% dividend allowance to £1,000 in 2023/24 and a further reduction to £500 in 2024/25, and the latest changes to NICs in January 2024 and March 2024, mean that business owners should re-evaluate their profit extraction strategies.
The relevant rates are summarised in the table below.
Corporation Tax Rates from 1 April 2023 |
|
| Profit band | Effective tax rate |
| Up to £50,000 | 19.0% |
| £50,001 to £250,000 | 26.5% |
| £250,001 and above | 25.0% |
Dividend Tax Rates 2023/24 and 2024/25 |
|
| Basic rate taxpayers | 8.75% |
| Higher rate taxpayers | 33.75% |
| Additional rate taxpayers | 39.35% |
Employee National Insurance Rates (on income between £12,580 and £50,280 per annum) |
|
| Until 31 December 2023 | 12% |
| From 6 January 2024 | 10% |
| From 6 April 2024 | 8% |
Basic rate and higher rate taxpayers
For basic rate taxpayers taking dividends generally remain more tax-efficient than taking salary, though a salary that is covered by their available personal allowance is typically advantageous if they have no other sources of income. However, salary/bonus will generally be more tax efficient for higher rate and additional rate taxpayers if the corporation tax rate of their company is above 19%.
These are generalisations; there are a great number of other variables that can affect the outcome of any remuneration calculations.
For example:
- the impact of pension contributions;
- other income streams including rental and investment income;
- implications of tax on other benefits in kind provided by the company, e.g., company cars;
- how the remuneration strategy may impact eligibility for tax credits (Child Tax Credit, Working Tax Credit), child benefit and other means-tested benefits.
- other ways of extracting income from the business for example through rent (if the business operates from premises that you own personally) and loan interest (if you have made loans to the company).
The wider view
It is important to place remuneration planning in the context of a more holistic view of your overall financial well-being, in particular:
- for retirement planning, the pensions regime remains a very favourable one;
- you should consider the terms of any life insurance and similar policies to ensure they cover dividend income and not just salary;
- there are also circumstances in which a regular salaried income is important for example, obtaining a mortgage.
Next steps
It is essential that your own personal circumstances are considered in the round in relation to your remuneration strategy. There is not a “one size fits all” solution.
Please contact your usual adviser or email us at info@rpg.co.uk to arrange to a meeting – we look forward to discussing this in more detail with you.
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