Family and personal companies – optimal salary for 202324

Setting the right salary for yourself or your family members in a personal company can feel like navigating a minefield of tax rules and allowances. Get it right, and you’ll minimise your tax bill whilst maintaining National Insurance compliance. Get it wrong, and you could be overpaying tax or facing HMRC scrutiny. In this post, we’ll walk you through the optimal salary strategy for the 2023/24 tax year and explain why one-size-fits-all approaches simply don’t work.

The £12,570 Personal Allowance Sweet Spot

Let’s start with the good news: everyone in the UK gets a personal allowance of £12,570 for 2023/24. This means you can earn up to this amount without paying any Income Tax. For company directors and family members, this threshold is crucial.

However, here’s where many business owners trip up. If you pay yourself a salary below £12,570, you’re leaving your personal allowance unused—but you’re also avoiding National Insurance contributions. The real magic happens when you balance salary against dividends, which we’ll explore below.

The National Insurance Threshold: £175 Per Week

This is the year to think carefully about National Insurance. As of April 2023, the Secondary Threshold for employers’ National Insurance is £9,100 per annum (approximately £175 per week). If you pay yourself a salary below this, you won’t trigger employers’ National Insurance—saving you 15% on top of the salary itself.

For employees’ National Insurance, the threshold sits at £12,570 for 2023/24, which aligns with the personal allowance. This means a salary at or just below this level avoids employee National Insurance entirely.

Many accountants recommend a “salary to the personal allowance” approach: pay yourself £12,570 per year (or slightly less if you want to stay beneath the employee NI threshold). This uses your allowance whilst keeping National Insurance at bay. From a pure tax efficiency standpoint, this often makes sense for owner-directors who can extract additional profit via dividends.

Dividends: The Second Part of the Equation

Once you’ve paid yourself an optimal salary, your company likely still has profit left over. Rather than extracting this as additional salary (which would trigger National Insurance and Income Tax), most owner-directors use dividends.

For 2023/24, the dividend allowance stands at £1,000. This means the first £1,000 of dividend income is tax-free. Beyond that, dividends are taxed at 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers, and 39.35% for additional rate taxpayers.

The key advantage of dividends over salary is that they don’t trigger National Insurance contributions—either for you or the company. This can make a significant difference to your take-home pay.

A common strategy combines a salary of around £12,570 with dividends extracted up to the basic rate threshold (£50,270 for 2023/24). Of course, this only works if your company has profits to distribute, and you must follow proper dividend documentation procedures.

Family Company Considerations

If you employ family members—perhaps a spouse or adult children—similar rules apply, but with additional complexities. Genuinely employing a spouse on a reasonable salary for genuine work performed is perfectly legitimate and often tax-efficient. However, HMRC scrutinises arrangements where family members receive salaries for little or no work.

Each family member has their own personal allowance and dividend allowance, so there can be real tax planning opportunities. A spouse earning £12,570 and receiving dividends up to their basic rate threshold effectively doubles your household’s tax-efficient extraction compared to a single director.

That said, you must keep detailed records of work performed, hours worked, and reasonable salary levels for the roles. HMRC will challenge arrangements that appear contrived purely to shift income between family members.

Practical Steps for 2023/24

Start by reviewing your company’s projected profit. Calculate a salary strategy that uses your personal allowance efficiently whilst minimising National Insurance. Document any family salary arrangements carefully. Run the numbers both ways—salary versus salary plus dividends—to see what works best for your circumstances.

Remember that optimal salary planning isn’t static. Your circumstances may change; HMRC thresholds certainly will. What works brilliantly this year might need tweaking next year.

For tailored advice, contact Severn Accounting — we’re here to help.