As in previous years, we’ve set out what we believe to be the most common optimum, then end with a few exceptions. Just to clarify, the below are suggestions for the tax year starting from 6 April 2023 and assume that any company work completed falls outside IR35.
The ‘Most Common’ Situation
We have opted for a salary that will trigger some employer NICs, but not employee NICs. Whilst paying over this employer NIC liability will be a small extra hassle, it’s just one extra company payment towards the end of the tax year, which we will notify you of.
For one person companies in 2023/24, we therefore recommend a salary of £1,047/month. This replaces £992/month for 2022/23. It’s the maximum before employee NICs become payable, yet is still sufficient to count as a contributing year towards basic state pension. As mentioned above, just be aware there will be a small amount of employer NICs payable on this salary shortly following the tax year.
Based on the above salary (£12,564 for the year) and no other personal income, you can take dividends of:
- £1,006 and suffer no personal tax (0%)
- £37,706 (i.e. an extra £36,700) and suffer £3,211.25 personal tax (£36,700 at 8.75%)
- £87,436 (i.e. an extra £49,730) and suffer £19,995.13 personal tax (the above £3,211.25, plus £49,730 at 33.75%)
The above thresholds are not hard limits, just the levels above which the marginal rate of tax increases (i.e. the amount of tax suffered on each extra £ of dividends taken). Above the top limit (£100k total income) you start to lose your personal allowance, so the effective tax rate becomes increasingly penal.
Employment Allowance – companies with 2+ staff won’t have any employer NICs to pay, as they will qualify for the employment allowance. Effectively, if your company has 2+ staff, the first £5,000 of employer NICs will be covered by the allowance.
Student Loan/High Income Child Benefit Charge – these aren’t really exceptions as such, but things to be aware of that can increase what you must pay. If you have an outstanding student loan or claim child benefit, and your total overall income is above the thresholds, then there will be additional charges of loan repayments and/or having child benefit clawed back. For high income child benefit, this is £50,000, whereas for student loans it depends on the plan:
- Plan 1 – £22,015 (9% on earnings above this).
- Plan 2 – £27,295 (9% on earnings above this).
- Plan 4 – £27,660 (9% on earnings above this).
- Postgraduate Loan – £21,000 (6% on earnings above this).
If you don’t want to be overly concerned with the precise details, then the general logic isn’t surprising. In most situations, as personal income goes up, the tax rate goes up.
Also, don’t be concerned about possibly dribbling just above a threshold. For example, if you went £10 into the higher rate band, it just means that the top £10 of your income would suffer 33.75% tax instead of 8.75% on your dividends. There’s no sudden sting for going pennies above a threshold.