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Remuneration planning: Navigating complexity in 2023

27/11/2023

Over the last number of years, a recurring theme of both Budgets and Autumn Statements has been the closing of the gap between the taxation of dividends and salary.

This has mainly been achieved with the increase in the tax on dividend income, including the removal of the notional dividend tax credit, the increase in the dividend tax rate and reduction of the annual dividend allowance.

Last week, we saw a measure which has further closed the gap between salary and dividend - the reduction in employee’s National Insurance from 12% to 10%. This reduction will have the desired effect of increasing the take home pay of employees up to a maximum of £754 a year.

The question then arises for business owners of whether to take a salary or to declare dividends when looking to remunerate themselves?

Over a number of years, the established approach has been to take a small salary, to ensure that entitlement to State Pension is obtained, and to take the remainder of their remuneration as dividends.

Following last week’s announcement this has not changed for the vast majority of cases. Although the tax saving of dividends compared to salary has been reduced, there is still a small saving in using this route.

But what about if your situation is not that simple? Maybe you already take a salary from your business at a higher level or have benefits in kind (such as a company car), what should you do then?

Unfortunately, the closing of the gap between dividends and salary means that there is no quick and easy answer to this question, and the position will depend on your exact circumstances. There are a few things to consider:

  • If you have salary utilising your basic rate band (£50,270 plus) then taking salary instead of dividend is more tax efficient – however, care needs to be taken if you have multiple employments as National Insurance would be calculated on each employment, removing this saving.
  • Do you have allowances that are not being utilised, for example the savings allowance and starting rate band, potentially up to £6k of interest income which can be tax-free. If you have lent your company funds it may be worth charging interest to take a tax-free income whilst obtaining tax relief in the company.
  • Pension contributions remain a very tax efficient part of remuneration planning.  With the increase in the annual pension allowance to £60k and the ability to use unused allowances from the previous three years, it may be time to have a look at your pension provision. 
  • Tax is not the only important factor in deciding how to remunerate yourself, and with the difference between dividend and salary shrinking, these other factors may now have more weight. For example, if you are obtaining finance or re-mortgaging, this is often easier if you can show a lender a salary rather than dividends as your main source of income.

Remuneration planning is no longer one size fits all, and the tax and non-tax considerations are ever increasing. As the difference between dividends or salary has reduced, therefore your aims and personal requirements will play a greater role in how to extract funds from your company.

If you have any questions or would like to consider your remuneration strategy, then please get in touch and we will be happy to help you through these ever-changing waters.

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