Main considerations when determining how much salary you should declare
There are many different considerations which may impact the amount of salary you take from your company, the main ones being:
- How much income you need to support your lifestyle?
- What other sources of income you have?
- Whether your company has sufficient profits to declare dividends
In this article we will assume:
- Your only source of income is your salary/dividends from the company
- Your company is profit making with sufficient profits (reserves) to declare dividends
- You have no other employee’s (other than directors)
Generally speaking, it is advisable to take a mixture of salary and dividends in order to optimise your tax position and pay the least amount of tax. It’s usually recommended that you take the maximum salary before you start incurring any tax and national insurance contributions and then to declare the remaining income you wish to take from the company as a dividend. By doing so, you not only save tax and national insurance on your salary, but you also save tax on dividends, as dividends are taxed at a lower rate than salary.
If you don’t have sufficient profits in the company, then you will be restricted as to how much dividends you can take from the company, in which case you may not have any other choice other than taking a higher salary.
Optimum director’s salary for 2022/23 tax year
For the tax year 2022/23 the optimum salary for a director is £11,908 per annum or £992 per month.
At this amount, you as a director will not be liable for any tax or national insurance contributions as the income is below your personal tax-free allowance of £12,570.
For national insurance purposes this amount is the maximum you can earn before you start paying national insurance (i.e the primary threshold for national insurance). As this amount is above the lower earnings level of £6,396 for national insurance purposes, it means that your salary will count towards your qualifying years for your future state pension.
What are the tax consequences for companies?
Based on a salary of £11,908, the company will get full corporation tax relief at 19% for 2022/23 (tax savings of £2,263).
As this amount is above the secondary threshold of £9,100 (the amount above which employers pay national insurance at 15.05%), the company will pay a small amount of employer’s national insurance of £423 for the year (£343 after considering corporation tax relief at 19%).
Despite the small amount of employer’s national insurance payable at this rate, the overall benefit is still greater and therefore optimising your tax position.
Can I pay myself more than £11,908?
Theoretically, yes you can pay yourself more than £11,908, but it may not be as tax efficient.
From an income tax perspective, any salary up to £12,570 (your personal allowance) will not attract any income tax. Earnings above £12,570 will be taxed at 20% if they fall within your basic rate tax band, 40% if in the higher rate tax band (above £50,270) and 45% if in the additional rate tax band (over £150,000).
For personal national insurance purposes, any earnings above £11,908 will attract national insurance contributions at 13.25%.
As mentioned earlier, if you don’t have sufficient profits in the company, then you will be restricted as to how much dividends you can take form the company, in which case you may not have any other choice other than taking a higher salary.
To conclude, for most people the recommended director’s salary amount is £11,908. This is usually the most tax-efficient salary to take for most directors.
As always with tax, it is never simple so if you would like us to review your personal circumstances and advise you on the most optimum directors’ salary for you, please get in touch with your client manager and who will be able to assist.