Dividends in 2023/24: a limited company director’s guide
Dividends – if you’re a seasoned contractor you’ll be well rehearsed in making the most from your take-home pay through the effective use of combining your salary and dividends.
Who needs to consider looking at their dividends strategy?
But what if you’re new to the game and need a little guidance, or are ‘experienced’ and in need of a little refresher? Even if you’re neither but still a limited company director, changes to the dividend allowance at chancellor’s Hunt last statement (his next one is next Wednesday) may mean you too have had to make changes.
Here exclusively for ContractorUK, SG Accounting managing director Dan Mepham, takes a closer look at dividends, what you need to know to make the most from them in tax year 2023/24, and what to expect with dividends on March 15th at Spring Budget.
What is a dividend?
First the fundamentals! A dividend is a distribution of your company’s profits among its shareholder/s.
Dividends can only be paid if your company has available profits, once tax (including corporation tax which is increasing to 25% depending on your company’s profits), VAT, other liabilities and business expenses have been paid.
Most small company owners ‘draw down’ a significant proportion of the profits of their company in the form of dividends, because it is more tax-efficient than taking a large salary/ It effectively rewards the shareholders for the investment in the company.
When can contractors draw dividends?
You can draw dividends whenever you like providing there is sufficient profits in the company.
When drawing dividends, you should document your decision, and provide all shareholder/s with a dividend voucher. These steps are needed as an audit trail should you ever be investigated by HMRC, and will also be required in preparing a personal tax return for shareholders.
What should your contractor salary be for 2023/24?
Whatever you like really because if you control the company, then it’s up to you to decide!
Salaries are an allowable expense which is entitled to tax relief, and that ultimately reduces your corporation tax bill.
Fortunately, if you’re the sole employee of your limited company, the National Minimum Wage Regulations don’t apply, so you can effectively pay yourself the salary amount of your choice.
That said, there are a few things to consider when deciding on salary levels such as the affordability for your company and the tax and National Insurance (NI) thresholds.
It is also worth considering the minimum salary level needed in order to qualify for the state pension and childcare support rules. The personal allowance for 2023/2024 is £12,570 which unusually remains the same level as the previous year. If you pay yourself a salary above this limit, the portion above the allowance is subject to income tax.
What are the tax and National Insurance Contributions implications?
Dividends are not subject to National Insurance but are subject to income tax (albeit at a different rate to salaries), with a 0% tax rate for the first £2,000, then from April 6th 2023, the limit will be reduced to £1,000, and £500 from April 6 2024. These are the two changes which chancellor Jeremy Hunt announced at his statement in November 2022.
The rates on dividends for 2023/24 are as follows:
- Personal allowance – up to £12,570 at 0%
- Basic rate – £12,571 - £37,700 at 8.75%
- Higher rate – £37,701 - £125,140 at 33.75%
- Additional rate – £125,141 + at 39.35%
There are both employee and employer NI considerations for limited company directors.
A director will pay Employee National Insurance contributions on their salary. This is 0% below £12,570; 12% between £12,570, and £50,270 then 2% above this.
An employer is also liable to pay Employer NIC, which is 0% on a salary below £9,100 and 13.8% above this. There is an Employment Allowance available to some employers with the effect that the first £5,000 of Employer NI is removed.
When are dividends taxed and how much will you have to pay?
Dividends become taxable on the date they’re declared as payable. For example, a dividend declared on October 10th 2022 as payable on April 10th 2023 would be subject to tax in the tax year April 6th 2023 to April 5th 2024.
Let’s take another example. A dividend declared on October 10th 2022 as payable on April 4th 2023 would be subject to tax in the tax year April 6th 2022 to April 5th 2023.
If you’re still unsure, check with your accountant to ensure you’re aware of the tax implications of drawing dividends at specific times throughout the year.
The amount of tax payable to HMRC will depend on which tax band you fall into. So for example, if you were to take a salary of £12,570 (£1,047.50 per month) and draw dividends up to the higher rate threshold of £50,270, the income tax payable would be £3,211.25 per year (£50,270 minus £12,570 Personal Allowance minus £1,000 tax free dividend allowance = £36,700 * 8.75% = £3,211.25).
Do dividends still have the edge despite the government reducing the allowance?
Dividends are taxed at a lower rate than salary so do continue to form part of a good tax-planning strategy.
It is also important to have bespoke, tailored advice as everyone is different. There are more things to consider than just tax for most people – for example pension contributions, childcare arrangements, charitable donations – and also how someone’s income levels and split may affect their eligibility for finance or mortgage applications.
What about Budget 2023 and dividends; should limited companies expect changes?
The Spring Budget next Wednesday doesn’t look to us like it will contain many significant changes to dividends, given what was announced last year. We already have the increase in corporation tax currently incoming despite concern about it from the small business community, as it will affect limited companies with profits over £50,000. But with the economic outlook being slightly less bleak than what many predicted last year, we don’t envisage that the new headline rates of 19-25% will be reneged on. 'Relative stability' are the buzzwords for this still-new chancellor and yet another series of repeals to tax changes doesn’t seem likely to me. But after last year, who really knows!