As a director of a close limited company in the UK, you may be wondering how to pay yourself a salary and dividends. It's important to ensure that you're paying yourself in a tax-efficient manner, while also following the legal requirements set by HM Revenue and Customs (HMRC). This insight will guide you through the process of paying yourself from a close limited company based on the latest tax rates and allowances, so you can maximise your income and minimise your tax obligations.
As a director of a close limited company, you have the flexibility to choose your salary. But it's important to keep in mind that your salary will affect both your personal income tax and any National Insurance contributions (NICs) that may be due. For the financial year 2023/2024, the personal allowance has been set at £12,570, which means you can earn up to this amount tax-free. Any income above this threshold will be taxed at the basic rate of 20%.
To determine your optimal salary, you should consider your personal financial circumstances, as well as the NIC thresholds and rates. For instance, if you are below the State Pension age and earning above the primary threshold of £12,570 you will be liable to pay Class 1 NICs. The NIC rate for the financial year 2023/2024 is 12% for earnings between £12,571 and £50,270, and 2% for earnings above £50,270. By optimising your salary and NICs, you can minimise your tax obligations and maximise your after-tax income.
As a director of a close limited company, you have the option to receive dividends alongside your salary. Dividends are paid out of the company's post-tax profits, so they're taxed at a lower rate than salaries. For the financial year 2023/2024, the dividend allowance has been set at £1,000, which means you can receive up to this amount in dividends tax-free.
Any dividends above this threshold will be taxed at the following rates:
To calculate your optimal dividend payments, you should consider your overall income and tax bracket, as well as the company's financial performance and cash flow. It's important to note that dividends cannot be paid out if the company does not have enough profits. You should consult with your accountant to ensure that your dividend payments comply with the legal and financial requirements.
Another way to maximise your income and minimise your tax obligations is to make tax-efficient pension contributions. As a director of a close limited company, you can make personal pension contributions and claim back tax relief based on your personal income tax rate. For the financial year2023/2024, the annual allowance for pension contributions has been set at £60,000, or 100% of your salary, whichever is lower.
By making pension contributions, you'll not only benefit from tax relief but also build up your retirement savings. It's important to keep in mind that pension contributions are subject to annual and lifetime allowances, so you should consult with your financial advisor to ensure that you're making the most of your pension options.
As the tax rules and allowances can change from year to year, it's important to stay up-to-date with the latest updates and announcements from HMRC. You should consult with your accountant or tax advisor to ensure that you're complying with the legal and financial requirements, and maximising your tax efficiency. You should also keep accurate records and receipts to back up your income and expenses, as HMRC may request them for auditing purposes.
Managing your income and tax obligations as a director of a close limited company can be challenging, but by following the latest tax rules and allowances, you can maximise your income and minimise your tax obligations. In this blog post, we've guided you through the process of paying yourself from a close limited company based on the latest tax rates and allowances for the financial year 2023/2024. By determining your optimal salary, calculating your dividend payments, making tax-efficient pension contributions, and staying up-to-date with the latest tax rules and allowances, you can ensure that your finances are on track and compliant with HMRC.
