The directors of most small limited companies pay themselves a salary. What is the most tax efficient salary level for the 2023/24 tax year?
There are several variables to consider when setting the salary levels, including:
- What are the current income tax rates and bands?
- What are the current Employers’ and Employees’ National Insurance rates and bands?
- Do you have income from other sources, e.g. investments or renting out a property?
- What salary level do you need to count as a valid year towards the State Pension?
If you’re looking for our 2022/23 salary guide, click here.
Why it is worth paying a director’s salary
Although there’s no legal obligation to do so, salaries are a legitimate business expense that can be offset against your limited company’s Corporation Tax bill.
Importantly, CT rates increase from April 2023 based on your annual profits, so the potential savings from paying a salary have also increased.
If you decide to pay yourself a £9,100 salary, your company will save a minimum of £1,729 in Corporation Tax. This assumes that your company profits are £50,000 or under. If your annual profits are higher, then your CT savings will also increase.
Another reason why you should pay yourself and other directors a salary is to make sure this tax year is a qualifying year towards your State Pension entitlement. To do this, your salary must be above the Lower Earnings Limit (see below).
There might be good reasons why a director does not receive a salary, for example if he/she is above state retirement age, or as a result of other income streams.
If you are in any doubt, always talk to your accountant when considering the best salary level to pay.
What are the Income Tax and National Insurance thresholds for 2023/4?
- Personal Allowance is £12,570. Most individuals are eligible – your tax code will be 1257L.
- Lower Earnings Limit (LEL) is £6,396. Pay yourself above this level to qualify for the State Pension
- Employees’ NI (Primary Threshold) is £12,570. You don’t pay employees’ NICs if your salary is below this level.
- Employers’ NI (Secondary Threshold) is £9,100. Your company pays employers’ NICs on salaries above this level, unless it is eligible to claim the Employment Allowance.
What is the optimal limited company salary for 2023/4?
To work out the optimum salary for this tax year, you need to consider the income tax and NI thresholds above, and if your limited company is eligible to claim the Employment Allowance.
Broadly speaking, you have two salary level options which we discuss below.
A note on the April 2023 Corporation Tax changes
In these examples, we have assumed that your company’s annual profits are £50,000 or less during 2023/24 – Corporation Tax is 19%.
If your profits are higher, your CT savings will also be higher, as CT is 26.5% on profits between £50,000 and £250,000. And 25% on profits above £250,000.
- No income tax is payable.
- No employers’ NICs are payable.
- No employees’ NICs are payable.
- Qualifying year towards the State Pension.
- Hassle-free as the amount of paperwork is reduced.
This may be an attractive salary for some directors as it is low-maintenance, and you don’t need to make any PAYE deductions via the company payroll.
However, it is not the most tax-efficient salary, following the recent rise in the employees’ NIC threshold to £12,570 to match the personal allowance.
£12,570 salary (single director, no Employment Allowance)
This is the most tax-efficient salary for 2023/4.
If your annual profits are £50,000 or less (CT is 19%), your company saves £659.30 in additional CT compared to £9,100. However, it must also pay £478.86 in Employers’ NICs.
The Employers’ NICs are also deductible against CT, saving another £90.98.
Overall, there is a net £271 benefit for single director companies at this salary level, compared to £9,100.
This isn’t a negligible sum of money, but you might still prefer paying yourself the £9,100 salary to minimise any paperwork.
£12,570 salary (claiming the Employment Allowance)
This is also the most tax-efficient salary for companies with 2+ employees if the company can claim the Employment Allowance.
There is no income tax or employees’ NICs to pay.
Thanks to the Employment Allowance (EA), the £478.86 Employers’ NIC costs are written off.
As a result, your company is £659.30 better off per employee at the £12,570 salary level, compared to £9,100.
Salary Comparison Table – £9,100 vs. £12,570
|Min. Corporation Tax saved||£1,729||£2,479.28||£2,388.30|
|Min. Corporation Tax saved vs. £9,100.||Nil||£750.28||£659.30|
|Net Saving to the company vs. £9,100||Nil||£271.42||£659.30|
|Employees’ NICs – paid by the employee||Nil||Nil||Nil|
What is the best salary/dividend mix for 2023/4?
To work out how much tax you will pay this year for any mix of salary and dividends, try our updated dividend tax calculator.
2023/24 Salary & Dividends Calculator
What if you are an umbrella company employee?
As a PAYE umbrella company employee, your umbrella will deduct income tax and National Insurance Contributions from your salary via the PAYE (Pay-As-You-Earn) system.
While there may be variations in service fees and perks provided by different umbrella schemes, the level of tax you pay should remain consistent between providers. Only an unscrupulous provider would claim otherwise.
What was the optimum director’s salary for 2022/23?
- For single-director companies, £9,100 was a tax-efficient salary to draw in 2022/23 with minimal administration.
- For single-director companies, £11,908 was the most tax-efficient salary to draw if you couldn’t claim the EA.
- If your company could claim the EA, £12,570 was the most tax-efficient salary in 2022/23.
- Find out more in our 2022/3 salary guide.
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 with minimal administration.
- If your company could claim the EA, £12,570 was the most tax-efficient salary in 2021/22.
Although all of our tax and accounting guides are verified by our own accountant, please use this information as a guide only. Always ask your own accountant if you have any questions about salary and dividends.
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