Give us your details and we’ll be in touch asap

Insights

All Articles

Business Services

Business Tax

Personal tax

Probate and Inheritance Tax

VAT

Business Services  •  Business Tax  •  Personal tax

Options for extracting company profits tax-efficiently in 2024

By RJP LLP on 29 April 2024

If you are a small company director/ shareholder, as the new 2024/25 tax year gets underway, now is a good time to be thinking ahead about the level of remuneration you will require over the coming 12 months – determining the level of company profits to extract. There is no single right way to go about this, every taxpayer will have different circumstances. You will probably have read about changes coming into operation after the 2024 Budget and this article takes the latest policies into consideration.

Sticking with a small salary

The ever-popular strategy of taking a small salary combined with dividends remains tax efficient. Provided the salary paid is at least equal to the lower earnings limit (£6,396 for 2024/25), it will qualify for national insurance contributions (NICs) which is important for eligibility to the state pension. If the salary paid does not exceed the primary threshold (set at £12,570 for 2024/25), no primary Class 1 NICs will be payable and it will be possible to secure a qualifying year for zero contribution cost.

Assuming the full personal allowance is available for the tax year, the optimal tax efficient salary for 2024/25 is £12,570. This is equal to the primary threshold and the standard personal allowance, with no tax or employee’s NICs payable on the salary.

Secondary NICs

If the employment allowance is not available (for example if the company is a personal company where the sole employee is also a director), there will be a small amount of employer’s (secondary) Class 1 NICs to pay. For 2024/25 the secondary threshold is set at £9,100, so on a salary of £12,570, the NICs bill would be £478.86. The corporation tax savings arising from paying a salary of £12,570 rather than £9,100 and on the employer’s NICs (both of which are deductible for corporation tax purposes) will outweigh the NICs paid by the employer. The rate of corporation tax relief will depend on the company’s profits and will range from 19% to 25%.

If employment allowance is available (for e.g. at a family company with at least two employees), there will be no employer’s NICs to pay, and the salary of £12,570 can be paid free of tax and employer’s and employee’s NICs.

What about having a higher salary?

Paying a salary in excess of £12,570 is not as tax efficient because the director will need to pay tax at 20% and employee’s NICs (at 8% for 2024/25) on the excess over £12,570, which will outweigh potential corporation tax savings.

Where the director does not have the standard personal allowance or has used up some of their personal allowance elsewhere, it will be necessary to calculate their individual optimal salary.

Finalising the right dividend amount

All taxpayers, regardless of the rate at which they pay tax, are entitled to a tax free dividend allowance. The dividend allowance is £500 for 2024/25.

Once an optimal salary is taken and provided there are enough retained profits, it is usually more tax-efficient to extract further profits as dividends rather than to take a higher salary or a bonus. This is also more flexible for smaller companies with fluctuating profits. If insufficient profits are available, the extra remuneration could be paid as a loan or a bonus, but these will have additional tax considerations.

Payment of dividends

A company needs to vote and pay dividends in proportion to the volume and type of shares held by each shareholder. Where the same class of shares is held by all shareholders, they must all receive the same amount of dividend per share on each occasion. Some companies have an ‘alphabet’ share structure, with shares in each class being held by different shareholders. This enables the payment of different levels of dividend to different shareholders.

The payment of salaries, and associated NICs, are treated as being made out of profits and attract corporation tax relief for a company; the payment of dividends is treated as being made from profits and does not attract corporation tax relief.

Dividend tax rates

Dividends are treated as an individual’s top level of income, and are taxed according to their highest band of income. However dividends do attract an overall lower rate of income tax, which is dependent on the band in which they fall. The rates of tax for dividends in 2024/25 are 8.75% in the basic rate band, at 33.75% to the extent that they fall in the higher rate band, and at 39.35% to the extent that they fall in the additional rate band.

Tax efficient benefits and loans

It is possible to take advantage of tax exemptions for benefits-in-kind, e.g. mobile phones, to extract profits from the company. Zero and low-emission company cars can also be tax-efficient benefits. Whilst company loans can provide short term benefits, the tax implications should be reviewed in advance depending on specific circumstances.

Although we are at the start of the new tax year, it’s worth thinking ahead to what level of remuneration you anticipate you will require during 2024, so you can make best use of the available tax reliefs and personal allowances.

To discuss company director remuneration strategies in more detail please contact partners@rjp.co.uk.

Read more articles like this

Failure to understand tax law costs property owner £25k capital gains tax

What’s your ultimate succession plan?

Basis period reform – the fallout isn’t over yet!

P11Ds are changing; avoid the double tax trap for employees

HMRC updates commuting cost guidance for WFH employees

Share this:

All Articles

Business Services

Business Tax

Personal tax

Probate and Inheritance Tax

VAT

Image
Image

60 Day Deadline for CGT Returns and Tax Payments

If you sell a property and incur capital gains tax on the transaction, you will need to file a tax return and also pay any tax that is due within 60 days of completion, or penalties will arise. Need help with your property taxes? Talk to us.