Limited company owners know all too well the goalposts move regularly to maximise your take-home pay, here we consider how to plan for your 2024/25 income with the effective use of combining your salary and dividends.
It's important to remember that the comparative tax rates for PAYE vs dividends is levelling, this is in part due to changes to the dividend allowance from April 6th 2024.
Changes to the tax-free dividend allowance
The tax-free dividend allowance is reducing from £1,000 to just £500 effective 6th April 2024.
What is a dividend?
For new Limited Company owners and those unfamiliar, a dividend is a distribution of your company’s profits to its shareholder/s.
Dividends can only be paid if your company has available post-tax profits, once liabilities and tax (including Corporation Tax which increased from 6th April 2023 to 25%, depending on your company’s profits) have been paid.
When can shareholders draw dividends?
Shareholders can draw dividends whenever you like providing there is sufficient profits in the company, as above.
When drawing dividends, you should issue shareholder(s) with a dividend voucher.
What should your Director salary be for 2024/25?
Your Director salary can be whatever you like - there are circumstances where a higher salary becomes more beneficial but there are considerations when it comes to small company Directors.
Fortunately, if you’re the Director of your limited company, the National Minimum Wage Regulations don’t apply to your PAYE earnings, so you can effectively pay yourself the salary amount of your choice. Salaries are an allowable expense which is entitled to tax relief, and that ultimately reduces your corporation tax bill.
When considering your salary level for 2024/25, think about the affordability for your company, and the tax and National Insurance (NI) thresholds. The tax-free personal allowance for 2024/2025 is £12,570 which remains the same level as previous years, anything above this limit is subject to income tax and NI.
There are both employee and employer NI considerations for limited company directors.
A director will pay Employee National Insurance contributions on their salary. This is 0% below £12,570; 10% between £12,570, and £50,270 then 2% above this.
An employer (your limited company) is also liable to pay Employer NIC, which is 0% on a salary below £9,100 and 13.8% above this. There is an Employment Allowance available to some employers (with more than one employee), which negates the first £5,000 of Employer NI.
What are the rates on dividends for 2024/25?
Dividends are not subject to National Insurance but are subject to income tax with currently a 0% tax rate for the first £1,000.
From April 6th 2024, this ‘tax-free’ limit will be reduced to £500.
The tax rates on dividends for 2024/25 are as follows:
Personal allowance – up to £12,570 at 0%
Basic rate – £12,571 - £37,700 at 8.75%
Higher rate – £37,701 - £125,140 at 33.75%
Additional rate – £125,141 + at 39.35%
Are dividends still the best way to draw income from my limited company?
Dividends are taxed at a lower rate than salary, so they do continue to form part of a good tax-planning strategy.
With recent changes to Corporation Tax and the tax-free dividend allowance, there is no one-size-fits-all solution, so it is important to have bespoke, tailored advice to your circumstances.
There are multiple things to consider than just tax for most people – for example pension contributions, childcare arrangements, charitable donations, and also how someone’s income levels and split may affect their eligibility for finance or mortgage applications.
We're here to help, get in touch.
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Equal Accountancy Ltd offers Accountancy and Bookkeeping services in Hemel Hempstead and surrounding areas across Herts, Beds and Bucks. We offer a range of services for Limited Companies, Self-Employed individuals and Landlords including Year End Accounts, Corporation Tax returns, Self-Assessment Tax returns, Payroll services, VAT returns, Bookkeeping and Company Secretarial. Get in touch today for a free, non-obligatory quote for your business needs.
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