Taking a salary – tax year 2024-25

Taking a Salary – 2024/25 Tax Year

The new tax year commenced on 06 April 2024 and in relation to taking a salary as a director / business owner, please read on for our guidance.

The tax year runs from 06 April 2024 to 05 April 2025 and guidance below applies to limited company directors only.

• To preserve National Insurance Contributions (NIC) records and to safeguard access to certain state benefits (in particular, the state pension), a salary from employment must be above the Lower Earnings Limit of £6,396 per year (£533 per month, £123 per week).
• The highest salary that can be paid that avoids Employer’ NICs (and preserves state benefit entitlement) is £9,100 per year (£758.33 per month, £175 per week).
• The highest salary that can be paid that avoids Employee NICs (and preserves state benefit entitlement) is £12,570 per year (£1,047.50 per month, £241.73 per week).
• The above thresholds avoid income tax.

As a business owner, you can draw a salary as follows:

*** Where your business is entitled to receive the employment allowance, Employer NICs will not be payable. The employment allowance is a grant of £5,000 towards Employer NICs.

Option 1:          Draw a salary at the Primary NI threshold

The Primary NI threshold has been set at £12,570 for the tax year. This equates to a monthly salary of £1,047.50.

There will be no income tax or employee NI contributions due and you would still retain your entitlement to state pension and statutory benefits. Employer NI contributions will be due at approximately £479.40 for the year (£39.95 per month).

Option 2:          Draw a salary at the Secondary NI threshold

The Secondary NI threshold has been set at £9,100 for the tax year. This equates to a monthly salary of £758.33.

There will be no income tax or NI contributions (both employee and employer) due.

Possible salary and dividend combinations

The table below provides the estimated tax liability using an income of £50,000.

For an owner managed business with simple affairs:

• Salary only remuneration at £50,000 per year creates a tax exposure of around £16,000. This is equivalent to a marginal tax rate of 32%.
• A mix of salary and dividends can create a lower tax exposure and marginal tax rate can be below 10%.

Note the following:

• Estimates based on 2024/25 tax rates.
• The first £500 of dividend is tax free.
• Dividends payable from distributable profits in company.
• Dividends can be declared at any time during the financial year (you must have an indication that your business will be in profit and have sufficient reserves).
• Remuneration over and above £50,000 combined will be exposed to higher tax rates.
• Above is an analysis of possible remuneration options and does not restrict or limit the amount of income you can pay yourself.
• Corporation tax payable on company profits of 19% to 25% before dividends can be accounted for.
• Company must be in profit and have sufficient reserves to distribute as dividends.
• Strategy beneficial if the only source of income is from your limited company.
• Strategy works for private companies limited by shares and certain community interest companies.
• By taking a salary, you will be saving approximately 19% – 25% on corporation tax – that is, if you take a salary of £12,570, you will derive a corporation tax saving of under £2,400.

You can view this correspondence in pdf via https://bit.ly/tac_salary_24_25

If you would like to discuss issues arising from this article or to find out more on the applicable tax exemptions, please contact Tobi Lab via hello@thetacuk.com or book a free Zoom online 15 minutes consultation via https://bit.ly/tac-connect-with-us