Salary or Dividends: Making the Right Choice Post-Budget

Whilst one of the main talking points from the recent Autumn Budget was the increased National Insurance burden for employers, has one change gone under the radar?

Key Changes in the Budget

• Employers’ National Insurance Increase:

The rate has risen from 13.8% to 15%, and the threshold at which National Insurance contributions apply has decreased from £9,100 to £5,000 per year. This means employers are liable for contributions on more of their employees’ earnings.

• Employment Allowance Increase:

To offset the above increase, the Employment Allowance has been doubled to £10,500 per year (up from £5,000). This allows eligible employers (those with more than two employees or two directors with a pension scheme in place) to reduce their annual National Insurance liability by up to £10,500.

How This Affects Remuneration Planning

With these changes, along with the rise in Corporation Tax in April 2023 (up to 25%), many small business owners are re-evaluating their approach to their remuneration. The traditional model of low salary and dividends to minimize tax may no longer be the most efficient for some small businesses.

A typical set-up for many Limited company owners is to have both husband and wife as directors and shareholders; this allows for the utilisation of both partners’ personal allowance and basic rate bands. The changes to the employment allowance will be of particular interest to Limited company owners with this structure as the Employment Allowance is available for them to claim.

The below shows the potential benefit of changing from a minimum salary and dividend mix to a 100% salary structure:

The above shows the total tax (personal and corporate) savings at differing levels of net pay. Once the Employment Allowance is fully utilised (approximately £65K combined net pay/£80k gross), the additional Income Tax and Employee’s National Insurance starts to outweigh the Corporation Tax saved on the high salary and a hybrid of both remuneration strategies should be considered.

Other Factors That May Affect Your Remuneration Planning:

• Distributable Reserves

Dividends can only be paid from sufficient retained profits. Salaries on the other hand, can be paid regardless of the company’s reserves.

• R&D Tax Relief

Paying salaries could be more advantageous if your business undertakes qualifying R&D work. Salaries, unlike dividends, qualify as eligible expenses for R&D claims.

• Profit Privacy

With potential upcoming changes at Companies House requiring more public filing of accounts, paying a salary (recorded as an expense) rather than dividends (reflected in distributable profits) could help maintain privacy regarding directors’ remuneration.

• Personal Financing Needs

Lenders often prefer clear evidence of income, such as a P60. While many recognize SME owners’ use of dividends, having a salary on record can simplify loan or mortgage applications.

• Timing of Tax Payments

As dividends are paid gross of tax, business owners are forced to save tax as they go in order to pay their tax bill in January and July. With a PAYE salary, all tax is deducted at source and paid by the company in real time.

Get In Touch

As always, there is no one-size-fits-all approach and with ever changing tax rates and allowances, the answer is always changing. The best solution depends on your company’s circumstances and financial needs. Contact your local Whitings LLP office today, to ensure that your remuneration package is structured efficiently.

Disclaimer - All information in this post was correct at time of writing.