Company directors – choosing between salary and dividends (II)
- TBA
- Oct 30, 2024
- 2 min read
Updated: Feb 25
Last time, we explored the advantages and disadvantages of receiving a salary versus dividends from your company. But now comes the crucial question: which option is ultimately more beneficial for your specific situation, and what factors should guide you in making that choice?
Historically, the answer was more straightforward—dividends were generally the more cost-effective option compared to taking a salary. However, recent changes in tax regulations have added layers of complexity to this decision, meaning there is no longer a simple one-size-fits-all answer.
1. New Regulations
One of the most significant changes has been the reduction of the dividend allowance threshold in the 2024/2025 tax year, now set at just £500.
This reduced threshold significantly limits the tax-saving benefits that dividends once provided, especially for directors looking to maximise their tax efficiency.
Additionally, if a company’s corporation tax rate exceeds 19%, the tax advantages associated with dividends can diminish, making it essential to weigh the pros and cons more carefully.
2. TB Accountants’ Approach
Our rule of thumb suggests a balanced strategy, where directors receive a low, tax-efficient salary from the company, keeping within the basic income tax bracket to minimise exposure to higher tax rates and National Insurance contributions.
The remaining profits can then be allocated as dividends. Importantly, your salary can also serve as a business expense, lowering the company’s taxable income and offering further tax efficiency. Combining these two elements—salary and dividends—usually provides the most cost-effective means of drawing income from the company.
Of course, each individual’s and company’s circumstances will influence the optimal approach. Before making a decision, consider a thorough analysis that takes into account several factors:
How much profit has your company generated?
How much are you looking to minimise your personal tax bill?
How much can you reduce your company’s tax obligations?
Do you wish to retain eligibility for state benefits, such as maternity pay or state pension, which are tied to your salary
3. Seek Professional Advice
It’s worth noting that this approach is a basic tax strategy, and individual circumstances will vary.
Therefore, we highly recommend consulting a professional tax advisor who can assess your specific situation and provide personalised advice. A professional can ensure your tax strategy aligns with your long-term financial goals and complies with the latest regulations.
If you need further assistance, TB Accountants is here to help. Our team of experts can work with you to plan a tailored tax strategy that best suits your unique circumstances, ensuring your business and personal finances are as tax-efficient as possible.
