What’s the Most Tax Efficient Director’s Salary in 2023/24?

As a director you’re legally separate from your limited company, even if you’re also the owner. This means that you’re not allowed to simply keep the profits for yourself in the same way that a sole trader can.

Instead, you’ll need to decide how much to pay yourself. The most tax-efficient way to take an income from your own limited company is normally through a combination of a low salary (in the same way as any other employee) and dividend payments.

 

If you’re a director, you’re technically an employee of your own limited company. This is an important point, because it means you’re both an employee, and an employer – of yourself! But why does it matter?

Employers and employees both pay National Insurance Contributions (NICs) on salary payments, but not on dividends. In that respect it might make sense to pay yourself a smaller salary and make up for it with dividend payments.

But the good thing about taking a salary is that it means you have regular income throughout the year which, because directors are ‘office holders’, can be below minimum wage without breaking any rules.

So how much should you pay yourself from your own company? Paying yourself as a company director is actually a bit of a balancing act in order to be as tax efficient as possible. To get the balance right it’s useful to consider:

• National Insurance contributions as both an employee and as an employer, as well as the benefits of making qualifying payments for the State Pension.
• How many people there are in the business
• Tax allowances for dividends
• Income tax allowances
• Tax relief for employee salaries

 

The thresholds for paying employer’s and employee’s NI are at different levels, so this has an impact on the amount of salary that you take.

If you take a salary from the business and it’s higher than the National Insurance threshold (the point at which you start paying National Insurance) for both employers and employees:

• Primary Threshold: You, as the employee, will start paying National Insurance on the salary that your company pays you
• Secondary Threshold: Your company, as your employer, will start making employer’s National Insurance Contributions on your earnings

 

This table can seem a bit confusing because the Secondary Threshold (when employers start paying NI) is actually lower than the Primary Threshold (when employees start paying NI). We’re including it because it shows where each threshold starts and ends, and this is useful when it comes to working out the optimal director’s salary.

It also gets a bit complicated because in 2022/23 there were changes during the tax year.

• The Primary Threshold (the point when employees start paying National Insurance) increased from £9,880 to £12,570 as of 6th July 2022 onwards
• The rate of National Insurance also changed for both employers and employees when the Health and Social Care Levy was scrapped. The change took effect from 6th November 2022 onwards.

The government’s Autumn 2022 budget announced that National Insurance thresholds would be frozen until April 2028.

 

Can I use the tax-free Personal Allowance on my director’s salary?

Yes, you can. The Personal Allowance is the amount you are allowed to earn before you have to start paying income tax. In 2022/23 and in 2023/24 the allowance is £12,570, so you only pay tax on the part of your income which is above the threshold.

 

Paying tax on dividends

It’s worth noting that although they’re not subject to National Insurance, dividends are subject to tax, but at a different rate to normal income tax.

The good news is that there is also a separate dividend tax allowance that you can use on top of the Personal Allowance. Unfortunately the threshold to start paying dividend tax is reducing, so you’ll start paying it on more of your dividend income.

 

Are salaries an allowable expense for Corporation Tax?

A limited company pays Corporation Tax on the profit that it makes throughout the year. Claiming tax relief on allowable expenses reduces the amount of profit, therefore reducing the amount of Corporation Tax which the company pays.

Salaries are an allowable expense, so if you’re a company director then paying yourself a salary from the business can help you lower your Corporation Tax bill.

 

The most efficient salary for sole directors is a bit more complicated because you can’t claim the Employment Allowance if you’re the only person in the business.

The optimum salary that you take depends on your circumstances, but as a very broad guide you have two options, each with their own considerations. You might pay yourself a director’s salary of £12,570, or you could go with the lower amount of £9,100.

Taking a salary of £12,570 (£1,047.50 per month)

A sole director taking a salary at this level will incur National Insurance on their wages, but this is offset against the tax relief they can claim against Corporation Tax.

• As a sole director you won’t be able to claim the £5,000 Employment Allowance. Taking a salary above the Secondary Threshold like this means that you’ll need to pay Employer NI contributions. It works out at about £478.86 for the year.
• Because this is less than £1,500 of employer’s NI per month, the company could choose to pay its contributions to HMRC on a quarterly basis, even if you receive a monthly salary.
• Although the company will incur employer’s NI, it will also be able to claim tax relief for your salary, which will reduce your Corporation Tax bill. This reduction is more than the employer’s NI that your company will need to pay on this salary, so will effectively cancel it out.
• This salary is at the Primary Threshold, so you won’t need to pay NI as an employee.
• It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
• This is at the tax-free Personal Allowance threshold for income tax
• Taking a higher salary might affect your company’s cash flow throughout the year (and will leave a bit less in the pot for dividends)
• It might also mean that your accountant or payroll provider charges you a slightly higher fee.

Take a salary of £9,100 (£758.33 a month)

Taking a slightly lower salary as a sole director can mean there’s more money left for dividends at the end of the year.

• As a sole director you can’t claim the Employment Allowance, but this salary is at the Secondary Threshold, so your company won’t need to pay employer’s NI on it anyway
• This is less than £1,500 of employer’s NI per month, so your company could choose to pay its contributions to HMRC on a quarterly basis, even if you receive a monthly salary.
• The company can claim tax relief against your salary, which will help to reduce its Corporation Tax bill
• This salary is lower than the Primary Threshold, so you won’t need to pay employee’s NI.
• It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
• This is less than the tax-free Personal Allowance threshold

 

What happens if I start a company but don’t take a director’s salary straight away?

If you register a limited company but wait a few months before taking a wage, you can backdate your optimum salary to the incorporation date and still remain tax efficient as long as you’re still in the same financial year.