Finding the best way to get paid becomes more challenging every year. Tax-saving opportunities are constantly changing, putting a strain on business owners trying to keep up with higher business costs.

What’s the best way to get paid in 2023?

As usual when it comes to tax, there’s no universal answer to this question. The best way to pay yourself in 2023 will depend on several factors, including your business structure, economic circumstances and current tax legislation. If you work as a sole trader, paying yourself is simple. You can withdraw money from your business accounts at your discretion, no questions asked. Limited company directors, meanwhile, must follow stricter rules when taking income from their business. The two main ways to do this are via salary or dividends.

Salary

You’ll need to put yourself on the company’s payroll to take a salary from your limited company. That means registering as an employer — even if you’re the only employee at your limited company.

Pros

Did you know taxpayers need at least ten qualifying years on their National Insurance record to qualify for the state pension? Paying yourself a salary could therefore help you prepare for retirement. You can also deduct your salary payments from your corporation tax return – reducing your company’s taxable profits. Unlike dividends, you can take a salary even if your company doesn’t make a profit. This may give you a more reliable income.

Cons

Since salaries are subject to a higher tax rate than dividends, this method could be less efficient. You’ll also need to pay employer’s and employee’s NICs. Meanwhile, running your own payroll can place an extra administrative burden on you as an employer — particularly if you need to account for benefits like pension contributions. Thankfully, hiring payroll experts to handle the process for you can save you time and stress, as well as keep you compliant.

Paying yourself in dividends

As a shareholder of your company, you can pay yourself in dividends. These payments are taken from your limited company’s profits after tax and depend on your share of the business.

Pros

As mentioned, dividends are subject to a lower income tax rate than salaries, making this an attractive option for many limited company directors. On top of that, neither employer’s nor employee’s NICs are payable on dividends, potentially increasing your income tax bill even further.

Cons

You won’t be able to pay dividends until you’ve paid your corporation tax bill. You’ll need to pay income tax on dividends, albeit at a lower rate. Moreover, the tax-free dividend allowance fell from £2,000 to £1,000 in April 2023 and will halve again to £500 in 2024. Finally, since dividend payments depend entirely on your company’s profits, relying on them could make your income unpredictable. If your company has a bad year, your personal finances may suffer.

Finding the perfect balance

The good news is you don’t need to pick one method or the other. Finding the perfect balance of salary and dividends can help you pay yourself in the most tax-efficient way possible in 2023. Many company directors pay themselves a low salary topped up with dividend payments to get the best of both worlds. This combination can minimise your tax bills while ensuring you still get paid every month — even if business is slow.

However, every business is unique, and each tax year brings its own challenges. At Durrani & Co, we look at every company on a case-by-case basis to ensure our clients get the most out of their money each year.

Want to know the best way to get paid in 2023? Get in touch with us today or check out our limited company services to find out how we can help.