The optimum directors salary 2022/23 will be changing and is changing to £11,908 per annum, which equates to £992 per month or £229 per week. This is the most tax efficient amount for the majority of directors to pay themselves.
Owner managed businesses can typically decide how to pay themselves. This can be either a salary, dividends or a mixture of them both. Directors, which have no other income should look to pay themselves the optimum directors salary of £11,908. Any additional income should be paid as dividends.
What is the optimum directors salary 2022/23?
The optimum directors salary 2022/23 is £11,908 per annum. The reason for this is all down to the National Insurance (NI) rates.
The lower earnings limit for NI in 2022/23 is £6,396 per annum. If you earn over this amount it will count as a qualifying year for your future state pension.
The primary earnings limit for NI in 2022/23 is £11,908 per annum. If your annual salary exceeds this amount you, the employee will need to pay NI contributions.
The secondary earnings limit for NI in 2022/23 is £9,100 per annum. If your annual salary exceeds this amount the employer (your business) will need to pay NI contributions.
Why is it £11,908 and not £12,570 per annum?
In the Spring Statement held on 23 March 2022, the employees NI primary threshold was increased to match the personal allowance amount of £12,570.
However this was only to commence from 6 July 2022. The earlier months remain at the original amount of £9,880 per annum. As a result, the employees NI threshold is only £11,908 for the tax year 2022/23.
Why not pay £nil salary?
A company can pay a director (who is also a shareholder) through either salaries or dividends.
A salary paid is a tax deductible expense. The company can deduct tax at 19%, which is the current company tax rate.
A dividend paid is not a tax deductible expense for the company.
Therefore paying a salary of £11,908 to the director saves corporation tax of £2,262. There is no such saving if dividends are paid.
Also, by paying a salary of £11,908 you are ensuring another qualifying year for the state pension is added.
When is a £nil salary advisable?
The optimum directors salary 2022/23 should be £11,908 per annum only if the director has tax allowances available.
In situations, where the director has other income such as pension income, another salary, rental income, it may be advisable to pay a £nil salary.
Why not pay higher salaries?
All taxpayers have personal allowances in which they can earn income tax free. As soon as these allowances are used up tax rates are applied.
When income exceeds £11,908 per annum, NI taxes are applied. Also, when the income exceeds £12,570 income taxes are applied.
The NI and income tax rates combined are significantly higher than the dividend tax rate. Even when accounting for the corporation tax reduction on the salaries, paying dividends is still more tax efficient.
When to pay more than the optimum directors salary?
In some certain circumstances it may be advisable to pay in excess of the optimum directors salary.
Should the director have a contract of service they must legally be paid the national minimum hourly wage. This would typically be higher than the £11,908 per annum.
Dividends can only be paid out if the company has profit and loss reserves. If the company has made losses in the past it may not be possible to pay dividends. Higher salaries may be the only option.
Can I claim the employment allowance?
The employment allowance allows a company to reduce their employers NI liability by up to £5,000 per annum. (In 2021/2022 the allowance was £4,000).
Unfortunately the employment allowance is not available to all businesses. A company must have multiple directors or employees to be able to make the claim. Who can claim the employment allowance.
Should an employment allowance claim be available, then the optimum directors salary is £11,908. The employers NI of £422 reduces down to £nil as it is covered by the allowance. The corporation tax saving when compared to a salary of £9,100, would be £533. (calculation is £2,808 at 19%).
The annual optimum directors salary is £11,908 but what is the monthly amount?
The annual amount is £11,908, which equates to £992 per month.
However the increase in employees NI does not commence until July 2022. As a result the £992 in months 1 to 3 may incur employees NI.
What was the optimum directors salary in 2021/22?
Every year the income tax and NI rates change. As a consequence the optimum directors salary changes every tax year.
The optimum directors salary in 2021/22 was £8,840.
What was the optimum directors salary in 2020/21?
The optimum directors salary in 2020/21 was £8,788.
How to optimise salary and dividends for directors in 2022/23?
When income exceeds £11,908, dividends are more tax efficient than additional salaries. This is because the dividend tax rates are lower than PAYE & NI tax rates.
Clearly an annual salary of £11,908 is not high enough for most individuals to live off. The additional income is then paid to the director as dividends.
To conclude;
The majority of owner managed businesses should pay themselves a salary of £11,908. However, we do expect many sole director businesses to pay the lower amount of £9,100. We then recommend additional income is paid as dividends.
The salary of £11,908 will save the company corporation tax of £2,262.