Tax Efficient Remuneration Strategy for Directors – 2013/14

Low Salary, high Dividend – What is the most tax efficient strategy for Directors for the year 2013/14?

New Tax Rates – 2013/14

The 2013/14 tax year starts 6th April, and there are changes to the tax and NI rate bands and limits.  Directors may need to make some changes to their salary withdrawal in order to take advantage of the new rates and limits.

The basic personal allowance for PAYE has increased to £9,440, HOWEVER, the NI thresholds for 2013/14 are lower, and therefore otpimum salary level would be to remain below the NI threshold.

National Insurance Limits

The employee NI threshold increases from £7,590 to £7,740, but your company’s NI will start at £7,690.  This, therefore, is the level you should aim to use in your calculations.  Paying yourself £640 per month will mean no PAYE/NI payable by yourself, and no NI payable by the company.  As long as you are paying yourself a salary, you will still receive a full year’s NI credit towards your State Pension (which will be increased to 35 years’ contributions from 2017 under the Government’s new Pensions Flat Rate Scheme).

Dividends

Providing the company is profitable, you can extract dividends from the company to make up the shortfall on income.  Dividends are extraced after Corporation Tax, and income tax is payable by the Director at a lower rate than PAYE.

Your annual income should, therefore, be made up by extracting dividends from the company.

The basic rate of tax for 2013/14 is 20% on taxable income up to £32,010.  Dividend rate is only 10%.

Tax Limits

Note that the higher earning rate limit has decreased significantly this year by £2,360.  This compares unfavourably to last year’s decrease which was in line with the increase in the personal allowance (therefore no change).  This year, however, there is a decrease in the amount you can take from the company (combined salary and dividends) before paying the higher rate of tax.

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