For owner-managed businesses, remuneration plans are something that should be considered each year. Now that we have commenced the 2023/24 tax year, the Shorts team has produced this guide to highlight the key changes affecting remuneration, including salary versus dividends, general payroll issues, dividends, and pensions.
Our main recommendations
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Is it better to take a salary or dividends?
Due to the increase in the main rate of Corporation Tax from April 2023 to 25%, there are some scenarios where salary is now a more cost-effective remuneration method for the company than dividends.
Including a higher gross salary can help maintain the same net income for individuals, while the Corporation Tax relief will result in a lower cost to the company.
However, there is still a benefit in choosing dividends over salary in the lower tax bands, which means there would need to be significant earnings (approximately £450k) to unwind the initial benefit in the lower rate bands unless there is an investment in R&D involved.
Changes to payroll
After the chaotic year to 5 April 2023, with changes to NIC rates and bands resulting in a hybrid NIC rate for directors of 12.73% and 14.53%, things should be a lot simpler this tax year.
There are two main options to choose from:
Salary to the Secondary Threshold
This is the maximum salary before incurring liability for Class 1 Secondary (Employers) NIC.
- £175 per week
- £758 per month
- £9,100 per year
Salary to the Primary Threshold
This is the maximum salary before incurring liability for Class 1 Primary (Employees) NIC, which now aligns with the tax-free personal allowance.
- £242 per week
- £1,048 per month
- £12,570 per year
Now that the margin between the primary and secondary threshold is much larger than in previous years, the Corporation Tax savings on the additional salary outweigh the NIC cost.
We, therefore, recommend business owners who remunerate themselves through a combination of small salary and dividends, opt for the £12,570 salary rather than £9,100.
Auto-enrolment
As the Primary Threshold salary is above the £10k per annum threshold for Auto-Enrolment, employees opting to increase to £12,570 per annum may be auto-enrolled into the workplace pension scheme. However, directors with no contract of employment can be excluded from the ongoing requirements of Auto Enrolment.
Those who do not fulfil these criteria will need to be assessed as normal. They will still have the opportunity to opt out but may be re-enrolled at each subsequent re-enrolment. If yours is a single director company with no other employees, it may be that there are no ongoing Auto Enrolment duties.
Dividend Allowance
Another change to consider is the reduction of the 0% dividend Allowance from £2k to £1k from April 2023, and to £500 from April 2024. If you are drawing a small dividend to utilise the 0% band, it may be beneficial to reduce this accordingly.
Pensions Annual Allowances
The Annual Allowance, which is the amount you can contribute to a pension without incurring a pension tax charge, has been increased to £60k from £40k with effect from April 2023. It is also worth noting the Annual Allowance is tapered for high earners with income in excess of £260k, and the £60k is reduced by £1 for every £2 above this to a minimum of £10k
If you have been maxing out £40k pension contributions, then you may be able to increase this to £60k. You should speak to a regulated financial adviser as there are other considerations when making such a decision. Please feel free to get in touch with our financial services team.
Speak to us about your remuneration plans
This guide contains general recommendations, which may not apply to every business and its owner. If you have any queries about the most efficient way to remunerate yourself, we encourage you to get in touch with our team for advice that is tailored to you and your situation.
