In December the Chancellor confirmed changes to the personal tax and NI limits for 2013/14. In view of this at what level should you set your salary (and dividends) for maximum tax efficiency?
New Limits
Once again the Chancellor pulled off a sleight of hand trick in his Autumn Statement. He confirmed a generous increase in personal tax-free allowances, but for higher rate taxpayers craftily snatched some of this back by reducing the point at which the higher rate tax kicks in.
The New Rates and Allowances
The new tax-free allowances and rate bands that will apply for 2013/14 are shown in the table below alongside the current ones:
| 2013/14 | 2012/13 | |
| Basic tax-free allowance | £9,440 | £8,105 |
| Basic rate 20% band on income to | £32,010 | £34,370 |
| Higher rate 40% on income from up to | £32,011£150,000 | £34,371£150,000 |
| Additional rate 45% (50% for 2012/13) on income over | £150,000 | £150,000 |
Ups and Downs
As you can see the total of tax-free allowances and basic rate band for 2013/14 have fallen by £1,025. The effect of this is that where your taxable income is no more than £100,000 you’ll see a reduction in your tax bill of just £62 for 2013/14 compared with the same amount of income for the current year.
NI Limits
The new and old rates are shown below:
| For employees | 2013/14 | 2012/13 |
| Weekly pay primary threshold | £149 | £146 |
| Upper earnings limit | £797 | £817 |
| For employers | 2013/14 | 2012/13 |
| Weekly pay secondary threshold | £148 | £144 |
The effect of these changes is pretty small in terms of take-home pay. If your aim is to avoid NI for you and your company, the increased thresholds mean you’ll be able to take just another £208 in 2013/14 compared to 2012/13 (see The next step).
Setting Your Salary and Dividends
The most tax efficient mix for director/shareholders of salary and dividends for 2013/14 is one where neither you nor your company pays NI, and you have no further tax to pay on the dividends you receive. Working on the assumption that you have no other income, this can be achieved with:
- an annual salary of £7,696, plus
- dividends of £30,379 (see The next step).
This will give you an annual income of £38,075 without an extra penny ending up in the Taxman’s coffers.
Here are some tax and business tips for you to consider:
Tip 1. If your spouse is also a working shareholder of your company they can take the same income as you. This could give you a joint no-further-tax income of £76,150.
Tip 2. If you receive other income, apart from dividends, e.g. bank interest, rental income, etc., you can adjust the income you draw from your company accordingly. The most tax efficient way to do this is to reduce the amount of dividends you take, not your salary.
Tip 3. Where you pay pension contributions or make Gift Aid donations, you can increase the amount of no-further-tax dividends you can draw (see The next step).
Ignoring the effects of other income, the most tax and NI efficient salary and dividend mix for 2013/14 is £7,696 and £30,199 respectively. No tax or NI will be payable at this level. You can increase the amount of dividends you can take tax efficiently where you make pension contributions or Gift Aid payments.
