Should you take a salary or dividends in 2023/24?

It can be challenging as a business owner, to know where the tipping point of remuneration is. Should you take a salary or dividends in the 2023/24 tax year, or a combination of the two? You deserve to be rewarded for your hard work and yet leaving your e-commerce business with insufficient funds can be detrimental to its growth. Let’s look at the options and see how to balance your financial needs and wants with those of your business for this tax year.

While allowance figures might change year on year, the basic approach remains relatively unchanged. Whether you take a salary or dividends or both in 2023/24 may be entirely dependent on the stage your e-commerce business is at. All options have advantages and disadvantages so let’s break them down.

Taking a salary

A salary has many advantages. First and foremost, it is an effective tax strategy, and it will have benefits in terms of contributions to your pension and contributory benefits. When you receive a salary, you benefit from and are entitled to benefit packages, bonuses, and paid holidays just like any other employee. You may also find that paying yourself a set salary makes it easier to apply for mortgages and insurance policies.

If you take a salary, you and your company will have to pay National Insurance contributions. Your business may have an available employment allowance, which in 2023/24 means your business can claim up to £5,000 a year off your National Insurance bill. However, if you are the sole employee then this is not available. For smaller businesses with eligible employees, this effectively eliminates the first £5000 of National Insurance payments that need to be made. Check if you are eligible for employment allowance, here.

Additionally, a salary gives you a regular income, which dependent on your budget, may be a crucial point that simply cannot be overlooked. Even if your business makes no profit, you will still be paid your salary which provides you security.

Without Employment Allowance

If your e-commerce business is still relatively new, it is likely that you won’t qualify for the employment allowance. In this case, the optimal salary point is the maximum yield within the primary threshold. For 2023/24 this is a net figure of £12,570, the same amount as your personal allowance, giving you a monthly salary of £1062. This figure has been frozen until at least the beginning of the April 2028 tax year. This will avoid any employee’s or employer’s National Insurance and tax. Despite no NIC or taxes being due, this still counts as a year of contributions for your record. Additionally, the salary will be an allowable expense against your business’ corporation tax liability.

Unlike dividends, salaries can be paid regardless of your business’ profit or loss, making it a frontrunner for your first-year trading.

With Employment Allowance

If your business does qualify for the employment allowance then a higher salary, at the rate of your personal allowance is the prudent call (£12,570). The employment allowance will almost entirely cover the employer’s NIC. The corporation tax reduction on the additional salary means your business will make a net saving.