Director's Optimal Salary 2022/23


For the 2022/23 tax year there are a number of changes to national insurance contribution thresholds and rates, and dividend tax rates to take account of the Health and Social Care Levy from April 2023.  Further information of the changes can be found within the Spring Statement 2022 section of our website.   

 

There is no change to the personal allowance for 2022/23 tax year, remaining at £12,570.  The dividend allowance remains at £2,000. 



The Employment Allowance is increased to £5,000 for those businesses that are eligible.  The rules regarding employment allowance remain unchanged with regard to Co's where there is only a single employee who is a director - the employment allowance is not available.  However, the employment allowance is restricted, from 6 April 2020, to those employers whose employer NICs bill was below £100,000 in the previous tax year.  In addition, as the employment allowance counts as 'de minimus state aid', employers will need to ensure claiming the employment allowance doesn't take them above the de minimus stae aid threshold.  Employers will need to claim the employment allowance and check they meet eligibility criteria.  Employers who are connected to other employers (such as companies within a group) will need to add together all of their employer Class 1 NICs liabilities incurred in the tax year prior to the year of claim to determine eligibility. 

 

Please note that the above, and examples below relate to UK taxpayers, but excludes Scottish taxpayers which are under devolved tax rules.  For further information for Scottish taxpayers please contact us directly.

 

Optimal Salary

 

The optimal salary for an individual will vary from person to person, and will be dependent on a number of factors, namely business income, income required by an individual, family members being involved in the business, other income from outside of the business and potential impact of National Living Wage, where a contract of employment is in place.

A common strategy is to take a low salary and a higher proportion of dividends for many small owner managed businesses.  The effective tax rates in respect of dividends are lower than paying a salary, and there are no NICs (employee or employer) payable on dividends, which in the past has made the use of dividends as a form of remuneration more attractive and tax efficient.  A small salary is usually taken as part of the strategy, as this is allowable for corporation tax purposes, whereas dividends are not, thus providing a small reduction in corporation tax.

 

Considerations:

  • It is important to pay a salary over the lower earnings limit (LEL) for NICs in order to qualify for certain state benefits.  The LEL is £123 per week.
  • Employee's Primary class 1 contributions are paid when pay exceeds the primary threshold of £190 per week (until 5th July 2022) and £242 per week thereafter.
  • Employer's Secondary class 2 contributions are paid when pay exceeds the secondary threshold of £175 per week.

 

Tax efficient remuneration

Generally for an owner managed business (OMB), where there is a single director, who is also a shareholder, the most efficient remuneration package is to pay a salary up to £11,908 (averaged primary earnings limit for 2022/23).  This equates to earnings of £992 pcm.  Anything above this amount should be paid in dividends.  

 

There will be some employers’ national insurance payable, however, this is offset by the corporation tax and personal tax savings.  In this scenario, the annual calculation for national insurance should be used to ensure no employee's national insurance is paid in the earlier part of the tax year, when the primary earnings threshold is lower.

 

Tax efficient remuneration – avoiding national insurance

 

Where a business wants to avoid the administration burden of processing and paying employer’s national insurance, they should pay a salary up to the secondary earnings limit of £9,100 (£758 pcm). Any amounts payable above this level, should be paid as dividends.

 

Tax efficient remuneration – where the employment allowance is available (and unused)

 

If a business is eligible for the employment allowance (and this is unused), a directors salary of £12,570 (personal allowance) is more tax efficient, with any additional amounts being paid as dividends.  There will be a small amount of employee’s national insurance, but this is offset by the corporation tax and personal tax savings.  The employer’s national insurance contributions are covered by the employment allowance. 

 

Note – all of the above scenarios pay a salary above the lower earnings limit and therefore will ensure eligibility for certain state benefits for the 2022/23 tax year, such as state pension. 


Please note the above scenarios take into account the following assumptions, unless stated otherwise:

  • Employment allowance is not available;
  • There is no student loan balance;
  • The only income is salary and dividends;
  • There is no contract of employment to state that NMW is applicable;
  • IR35 is not relevant; and
  • The company has sufficient distributable reserves, out of which the dividends can be paid. 



Tax planning

 

  • Tax savings may be available through splitting of income with spouses or family members, via transfers of shareholdings.
  • Company pension contributions continue to be tax deductible for the company with no tax implications for individuals, up to the annual and lifetime allowance.
  • If the company is run from home, the director may be able to charge to company rent, although this would need to be declared as income is a self assessment tax return and taxed accordingly.  
  • A company can only declare a dividend, where there are sufficient distributable profits to pay the dividend. Where there are insufficient distributable profits to pay dividends, the dividend would be classed as unlawful.


Each business is different and the above illustrations may not be applicable for some businesses, therefore please contact us to discuss your and your businesses individual circumstances. 

 









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