Optimising Director’s Remuneration: Balancing Salary and Dividends

As a director of a limited company, deciding how to pay yourself is one of the most important financial decisions you’ll make. Finding the right balance between taking a salary and paying yourself dividends can significantly impact upon both your personal tax liability and the overall efficiency of your company’s finances.

In this article, we’ll explore the key considerations for optimising your remuneration strategy, helping you make informed decisions that align with your financial goals.

1. Understanding Salary vs. Dividends

• Salary: A salary is a regular payment made by the company to you as an employee. It’s subject to Income Tax and National Insurance Contributions (NICs). The company also pays Employers’ NICs on the salary it pays you.
• Dividends: Dividends are payments made to shareholders from the company’s profits after Corporation Tax has been paid. Dividends are not subject to NICs, making them a tax-efficient way to extract profits from the company. However, dividends are subject to Dividend Tax, which varies depending on your income tax band.

2. The Basic Approach: Low Salary, High Dividends

One common strategy for directors is to take a low salary and high dividends. This approach can be tax-efficient because:

• National Insurance Savings: By taking a lower salary, you reduce the amount of NICs payable by both you and the company.
• Tax-Free Allowances: You can take advantage of the Personal Allowance (currently £12,570) and the Dividend Allowance (currently £500) before paying any Income Tax or Dividend Tax.
• Lower Income Tax Rates: Dividends are taxed at lower rates than salary income, especially for basic and higher-rate taxpayers.

3. Setting the Right Salary

• Above the NICs Threshold: Many directors choose to set their salary just above the Lower Earnings Limit (£6,396 for 2024/25) but below the NICs Primary Threshold (£12,570 for 2024/25). This allows you to qualify for state benefits, such as the State Pension, without paying NICs.
• Impact on Company Profits: Remember that salary payments reduce your company’s taxable profits, which in turn reduces the Corporation Tax liability.

4. Paying Dividends: What to Consider

• Profit Availability: Dividends can only be paid out of profits after Corporation Tax. It’s essential to ensure your company has sufficient retained profits before declaring a dividend.
• Dividend Tax: Dividend income is subject to Dividend Tax, which is currently 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers (2024/25). Balancing your dividend payments with your other income can help you stay within a lower tax band.
• Timing: The timing of dividend payments can also affect your tax liability. It may be beneficial to spread dividend payments over different tax years to maximise the use of tax allowances and minimise tax exposure.

5. Pension Contributions as Part of Your Strategy

• Tax Relief: Pension contributions made by your company are tax-deductible and reduce your company’s Corporation Tax liability. These contributions do not count as a benefit in kind, so they’re not subject to Income Tax or NICs.
• Long-Term Planning: Including pension contributions as part of your remuneration strategy can be a tax-efficient way to build wealth for the future, particularly if you’ve already maximised your tax allowances through salary and dividends.

6. Compliance and Record-Keeping

• Formal Procedures: It’s important to follow formal procedures when declaring dividends. This includes holding a directors’ meeting to declare the dividend and keeping minutes of the meeting. A dividend voucher should also be issued to each shareholder.
• Accurate Records: Keeping accurate records of salary payments, dividend declarations, and pension contributions is crucial for staying compliant with HMRC regulations.

Conclusion

Balancing salary and dividends is key to optimising your remuneration as a company director. By understanding the tax implications and carefully planning your payments, you can maximise your income while ensuring compliance with HMRC.

For directors looking to refine their remuneration strategy, a conversation with an accountant can provide clarity and ensure that your approach aligns with both your financial goals and regulatory requirements. The right strategy not only benefits your current financial situation but also supports the long-term success of your business.

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