Most limited company directors draw down funds as a mixture of salary and dividends – typically a tax-efficient salary, with any retained profits declared as dividends to shareholders. What is the optimum director’s salary for 2022/23?
To work out the tax-efficient salary for limited company directors, you need to consider
- What are the Income Tax and National Insurance thresholds?
- Can your company claim the Employment Allowance?
- Any other personal circumstances, e.g. income from other sources.
Do you need to pay a director’s salary?
There is no legal requirement to do so, however a director’s salary is a legitimate business expense, and your company will save Corporation Tax on the amount paid.
For example, a £9,100 salary will result in a £1,729 Corporation Tax saving.
Also, in order to qualify for the state pension, you need to be in receipt of a salary above the LEL (see below) for that tax year to be counted as a qualifying year.
There may be situations where a director would not draw a salary, for example, if he/she has other sources of income, or is above the pension retirement age. Your accountant will be able to advise you further.
What are the Income Tax and National Insurance thresholds for 2022/3?
- Personal Allowance is £12,570. For most taxpayers, no Income Tax is payable beneath this threshold.
- Lower Earnings Limit (LEL) is £6,396. Your salary needs to be at this level or higher for it to count towards your state pension.
- Employees’ NI (Primary Threshold) is £11,908. You pay no Employees’ NI beneath this threshold. The threshold actually changes during the tax year. It is £9,880 from April 6th to July 5th, and £12,570 thereafter. £11,908 is the annualised threshold.
- Employers’ NI (Secondary Threshold) is £9,100. Your company pays no Employers’ NI beneath this threshold.
What is the most tax-efficient limited company salary for 2022/3?
The optimum salary level is dictated by the current Income Tax and NI thresholds listed above, and whether or not your company can claim the Employment Allowance.
Broadly speaking, you have three options: £9,100, £11,908, and £12,570, which we discuss below.
This is a tax-efficient salary, as no Income Tax, Employers’ or Employees’ NI are payable at all. This also means less administration, and no need to make quarterly payments to HMRC.
There is a marginal tax advantage to taking an £11,908 salary (see below), due to the recent rise in the Primary Threshold. However, for many limited company owners, £9,100 is a low-maintenance, hassle-free salary.
This is the most tax-efficient salary for single owner-director companies. Your company saves £533.52 in additional CT compared to £9,100. However, it must also pay £422.60 in Employers’ NICs. The Employers’ NIC cost is also CT deductible, saving a further £80.29.
Overall, there is a net £191.21 benefit for single director companies at this salary level, compared to £9,100. It is a personal choice to decide whether it is worth the small gain, given your company will have to account for Employers’ NICs during the tax year.
If your company has 2+ employees and can claim the Employment Allowance (EA), the £422.60 Employers’ NIC costs are written off, so the company is £533.52 better off, per employee, compared to £9,100.
Please note that the Primary Threshold rises during the 22/23 tax year, following the changes announced in the March Spring Statement. For the first 3 months, it is £9,880. From July 6th onwards, it is £12,570. On an annualised basis, this is where the £11,908 figure is derived from.
This is the most tax-efficient salary for companies with 2+ employees if the company can claim the Employment Allowance.
The company will make a CT saving of £659.30 compared to the £9,100 level, per employee.
For directors and employees, there is a small £87.72 Employees’ NI liability to pay.
Salary Comparison Table
|Tax||£9,100||£11,908||£11,908 (EA)||£12,570 (EA)|
|Corporation Tax saved||£1,729||£2,262.52||£2,262.52||£2,388.30|
|Corporation Tax difference||Nil||£613.81||£533.52||£659.30|
|Net Saving to Company compared to £9,100||Nil||£191.21||£533.52||£659.30|
|Employees’ NICs – personal cost to director||Nil||Nil||Nil||(£87.72)|
What is the optimum salary/dividend mix for 2022/3?
To find out the total tax you will pay for a given salary/dividend mix, try our popular dividend tax calculator.
Umbrella company employees
If you are a PAYE umbrella company employee, your income will be subject to standard PAYE (Pay-As-You-Earn) income tax deductions and National Insurance Contributions.
Although there may be differences in service charges, and the value of ‘perks’ offered by different umbrella scheme operators, you should be subject to exactly the same levels of taxation. It is unethical for umbrella firms to claim otherwise.
What was the optimum director’s salary for 2021/22?
For single-director companies, £8,840 was a tax-efficient salary to draw in 2021/22
If your company could claim the EA, £12,570 was the most tax-efficient salary in 2021/22.
- Every tax year, various accountants like to copy our salary and dividend articles verbatim and republish them on their own websites. Please do your own work!
- Find out more about what dividends are, and how to account for them in our detailed guide to limited company dividends.
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- Although the information contained on our site is verified by our own accountant, this article should be used as a guide only. Please contact your own accountant if you have any questions.