What is the optimum Directors Salary for 2023/24?

 

 

Directors are responsible for managing and overseeing the operations of a company, and they are often compensated with a salary. However, when it comes to directors’ salaries, there are several factors to consider to ensure that they are tax efficient. In this post, we’ll explore the most tax-efficient salary for 2023/2024 in the UK. Whether directors should pay themselves dividends, how National Insurance affects directors’ salaries, and whether directors can use the tax-free Personal Allowance on their salaries.

What is the Tax Efficient Salary for a Director?

Most Tax-Efficient Salary for a Director in 2023/2024

The most tax efficient salary for 2023/2024 in the UK depends on several factors, such as the director’s personal circumstances and the company’s profits. Generally, it is advisable for directors to pay themselves a salary up to the National Insurance (NI) threshold. Which is currently £9,568 for the 2021/2022 tax year. This allows directors to qualify for state benefits and contribute to their state pension.

Any additional income can be taken as dividends, which are taxed at a lower rate than salaries. For the 2021/2022 tax year, the tax on dividends is 7.5% for basic rate taxpayers. 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. Directors must ensure that they have enough retained profits in the company to pay themselves dividends and must declare these dividends on their self-assessment tax returns.

Should Directors Pay Themselves Dividends?

Directors should pay themselves dividends only if there are enough retained profits in the company to do so. If there are no retained profits, it is not possible to pay dividends. Directors should also consider the tax implications of paying themselves dividends, as they are taxed at a lower rate than salaries.

However, it is important to note that paying dividends does not qualify directors for state benefits or contribute to their state pension. Directors must pay National Insurance contributions on their salaries to qualify for these benefits.

What Does National Insurance Mean for Directors Salary?

National Insurance (NI) contributions must be taken into account when calculating a director’s salary. Directors are responsible for paying both employee and employer NI contributions. The employee NI contributions are deducted from the director’s salary, and the employer NI contributions are paid by the company.

For the 2021/2022 tax year, the employee NI rate is 12% on earnings above £9,568 up to £50,270, and 2% on earnings above £50,270. The employer NI rate is 13.8% on earnings above £8,840.

Can Directors Use the Tax-Free Personal Allowance on their Salary?

Directors can use the tax-free Personal Allowance on their salaries. For the 2022/2023 tax year, the Personal Allowance is £12,570. However, this allowance may be reduced if the director’s income exceeds a certain threshold.

Directors should also note that the Personal Allowance cannot be used on dividends, as they are already taxed at a lower rate than salaries.

Paying Tax on Dividends

Directors must declare their dividends on their self-assessment tax returns and pay any tax owed by 31 January following the end of the tax year. Directors must pay tax on their dividends, which are taxed at a lower rate than salaries. For the 2021/2022 tax year, the tax on dividends is 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers. Also, from the 2022-23 tax year there are further changes in dividend tax rates. The basic rate has increased to 8.75% from 7.5%. Higher rate dividend taxpayers rate has been increased from 32.5% to 33.75%. Finally, additional rate dividend taxpayers will pay 39.35% instead of 38.1%.

Can I use salary to reduce my corporation tax liability?

Yes, you can. Salary is an allowable expense and if you are a limited company, the salary paid to you as a director will reduce your tax bill.

What is the most tax efficient optimum salary for a director for 2023/24 as a sole trader?

Determining the most suitable salary for sole directors is somewhat intricate. Due to the ineligibility for the Employment Allowance when operating as the sole individual within the business. The optimal salary choice relies on your specific situation. As a general guideline, you have two alternatives to consider. You can opt for a director’s salary of £12,570 or choose the lower sum of £9,100.

Salary of £12,570 (£1,047.50 per month)

When a sole director receives a salary at this level, they will be subject to National Insurance (NI) contributions on their wages. However, it’s important to note that this NI cost can be offset against the tax relief that can be claimed against Corporation Tax.

  • As a sole director, you should be aware that you won’t be eligible to claim the £5,000 Employment Allowance. If you opt for a salary above the Secondary Threshold, it will require you to make Employer NI contributions, which typically amount to approximately £478.86 annually.
  • If your company’s monthly employer’s NI contribution remains below £1,500. You have the option to pay these contributions to HMRC on a quarterly basis, even if you receive a monthly salary.
  • Despite the company incurring employer’s NI contributions, it’s essential to remember that your company can also claim tax relief for your salary. This tax relief effectively reduces your Corporation Tax liability, often more than offsetting the employer’s NI payments.
  • This salary level falls within the Primary Threshold for NI contributions, which means you need not require to pay NI as an employee.
  • Additionally, it’s worth noting that your salary exceeds the Lower Earnings Limit. Ensuring that you continue to earn NI credits, which can be beneficial for your state pension.
  • Furthermore, your salary aligns with the tax-free Personal Allowance threshold for income tax.
  • However, it’s important to consider that opting for a higher salary may impact your company’s cash flow throughout the year, potentially leaving less available for dividend payments.
  • Finally, keep in mind that a higher salary might also lead to slightly increased fees from your accountant or payroll provider.

Salary of £9,100 (£758.33 a month)

Opting for a slightly reduced salary as a sole director can result in having more funds available for dividends at the end of the fiscal year.

  • Since you’re a sole director, you cannot claim the Employment Allowance. However, it’s worth noting that this salary falls within the Secondary Threshold. Meaning your company need not require to pay employer’s National Insurance contributions on it.
  • The amount involved is below the threshold for monthly employer’s National Insurance payments, which means your company has the flexibility to make these contributions to HMRC on a quarterly basis, even if you receive your salary monthly.
  • Your company has the advantage of claiming tax relief on your salary. A step that can significantly reduce its overall Corporation Tax liability.
  • Notably, this salary is situated below the Primary Threshold, sparing you from the obligation to make employee’s National Insurance contributions.
  • Importantly, this income surpasses the Lower Earnings Limit, ensuring that you continue to accumulate National Insurance credits, which holds great promise for your state pension.
  • Furthermore, it’s essential to recognize that this salary remains below the tax-free Personal Allowance threshold.

What is the most optimal and tax efficient salary if there are two directors?

Employing at least one staff member or having two or more directors on the company payroll renders you eligible to access the Employment Allowance. Allowing you to draw a higher salary while remaining tax-efficient.

  • For the fiscal year 2023/24, the most tax-efficient salary for two or more directors is £12,570.
  • This optimal salary figure arises because when there are two or more directors. They can collectively draw an annual salary up to the Primary Threshold without the obligation to pay employee’s National Insurance contributions. Additionally, they can utilize the £5,000 Employment Allowance. To offset the employer’s National Insurance portion they would otherwise be liable for.

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