Directors’ Salary 2022/23 – What should I pay myself?
The owner of a business has the ability to decide how to pay themselves. This could be a salary, dividends or a mixture of both.
In previous years we were recommending directors pay themselves salaries up to the second threshold. For 2022/23 this threshold is £9,100 per annum. This figure will avoid you paying PAYE, Employees and Employers NI. Is this an optimal salary for the next financial year?
Our recommendation – no, it’s not. The optimal salary for 2022/23 is £11,908.
If you are a director of a company that doesn’t have any other streams of income, you should pay yourself a salary of £11,908 per annum. Other additional income should come in a form of dividends paid by the limited company.
Why not pay the director’s salary of £9,100?
Our advised optimum salary will be liable to pay Employers NI but it would save you more in corporation tax. The extra Employers NI will £422 (11,908 – £9,100 = £2,808 x 15.05%). However, the saving made on corporation tax will be £613 (£2,808 x 19% = £533.52 add corporation tax on Employers NI Expense £422 x 19% = 80.18. Total: £613.7)
Why the figure of £11,908 and not £12,570?
In the recent Spring Statement by Rishi Shunak released on the 23rd of March, the employee’s NI threshold was increased up to £12,570 to match personal allowance. However, this will take an effect as of the 6th of July 2022. Before then the threshold will remain the same – £9,880 per annum. As a result of this, if you pay yourself £992 per month (£11,908/12 months) this will incur Employees NI in months 1 to 3.
ADVICE: Make sure you use the Director’s Annual Calculation for NI when running payroll. This would avoid any employee NI charges in earlier months. Otherwise, process salary at £823 in the first three months and increase to £1,048 for the remainder of the year.
Salary plus Dividends for Directors/Shareholders in 2022/23
Dividends rates are lower than PAYE and NI rates. Therefore, when your income exceeds £11,908, the dividend route is more advisable. Dividends have their own untaxable allowance of £2,000. This means that the first £2,662 worth of dividends will be tax-free (Personal Allowance £12,570 less salary £11,908 plus dividends allowance £2,000). The director has therefore £14,570 all of which is tax-free.
The next £35,700 of dividends will be taxed at 8.75% (rate increased from 7.5%). This will take us up to the top level of the basic rate – £50,270. Dividend tax rates for higher rate taxpayers are charged at 33.75% (£50,271 – £150,000) and additional rate taxpayers at 39.35%.
A director who earns £50,270 through paying himself the optimal salary and dividends will pay personal taxes of £3,124 per annum which comes at a rate of just over 6%.
Why pay a salary -NIL Salary?
The salary is a tax-deductible expense and dividends are not. Therefore, paying yourself a small director’s salary will save £2,262 in corporation tax. Also, by paying yourself a salary you are adding another qualifying year for a state pension.
The nil salary is advisable if the director doesn’t have an untaxed allowance. These could be situations, where the director receives other income like rental, pension, another salary.
Why not pay a higher salary?
Once you have used the personal allowance, PAYE and NI have to be paid. The combined together rates are significantly higher than the dividend tax rate.
