Tax efficiency for directors of state pension age

Profit extraction

If a company has profits, the most tax-efficient way to pay these to the owner managers is as dividends, with the exception of tax-exempt perks. However, these can’t be paid in cash and so have a limited usefulness. For cash income the choice is therefore between dividends and salary. The tax and NI rates which apply to both of these respectively will increase by 1.25% from 6 April 2022.

Salary tax and NI pros and cons

The main advantage of dividends over salary is that they aren’t liable to NI. However, when our director reached state pension age (SPA) they no longer have to pay NI on their salary. This raises the question of whether it’s then more tax/NI efficient to take salary rather than dividends.

The bad news is that whilst the director isn’t liable to NI on their earnings, the company is. Nevertheless, avoiding 12% (13.25% from 6 April 2022) NI added to the corporation tax (CT) saving the company gets for paying salary instead of dividends will significantly change the dividends v salary picture.

Tax efficiency comparisons

We’ve looked at the dividends v salary tax for 2022/23 for basic and higher rate taxpayers who have reached SPA. For our first calculation we assumed the company pays £50,270 dividends for 2022/23 as a whole and compared this with a salary which after accounting for CT relief cost the company the same. The figures are summarised in the first table below.

Dividends	£50,270
Salary		£54,844
Less personal allownace	£12,570	£12,570
Chargeable to tax	£37,700	£42,274
Tax payable	£3,124	£9,370
Owner manager’s net income	£47,146	£45,474

 

Dividends remain the most tax-efficient way to take income but the difference between the two, as a percentage of the cost to the company (£50,000), is just 3.34%.

When we look at higher rate taxpayers, i.e. for income falling above the basic rate threshold (£50,270), the tax/NI advantage of dividends is still there but it’s even further reduced. The table below shows the figures for £10,000 taken in addition to the £50,270 per the previous table. The tax advantage is just 1.86%, i.e. £186 per £10,000.

Dividends	£10,000
Salary		£10,731
Tax payable	£3,375	£4,292
Owner manager’s net income	£6,625	£6,439

 

The employment allowance may be available to reduce the employers’ NI liability by up to £4,000. Where it is, the advantage of dividends will be further eroded or completely lost thus making salary rather than dividends the more tax-efficient way to take income from the company