Optimum Directors Salary Guide

Published on November 01, 2023

Income TaxNational InsuranceDividendsCorporate Tax

Dividends Tax The optimum director's salary for the fiscal year 2023/24 is set at £12,570 per annum, which breaks down to £1,047 per month or £241 per week. This amount is considered the most tax-efficient for the majority of directors, especially for those managing their own businesses and deciding their pay structures, which can be a combination of salary, dividends, or both.

HRMC Income Tax

Why £12,570 is the Optimal Amount

This specific figure is optimal due to its alignment with the National Insurance (NI) thresholds:

  • Lower Earnings Limit (LEL): £6,396 - Earning above this ensures a qualifying year for your state pension.
  • Primary Threshold (PT): £12,570 - Earnings above this threshold attract employee NI contributions.
  • Secondary Threshold (ST): £9,100 - Earnings above this threshold attract employer NI contributions.

By setting the salary at £12,570, directors ensure qualification for the state pension without the need to pay any personal NI contributions.

Tax Efficiency and Salary Structure

Paying a salary up to £12,570 is efficient because:

  • It aligns with the personal allowance, hence no income tax is due.
  • It saves corporation tax between 19% and 26.5% due to salaries being a deductible expense.
  • It adds a qualifying year for the state pension.

Conversely, dividends are not a tax-deductible expense for the company.

When to Consider a £nil Salary

A £nil salary could be advisable when the director already has sufficient income covering the personal allowance or is no longer concerned with accumulating qualifying years for the state pension. In these cases, seeking specialist tax advice is highly recommended.

The Case for Higher or Different Salaries

While £12,570 is optimal for most, there are scenarios where different amounts could be more suitable:

  • National Minimum Wage Compliance: Directors under a contract of service must at least earn the minimum wage.
  • Profit and Loss Reserves: If the company cannot pay dividends due to past losses, a higher salary may be necessary.
  • Employers NI Consideration: While the recommended £12,570 salary does attract some employers NI, it results in more corporation tax savings.

To calculate your Income tax, you can use the following tool Take Home Pay Calculator .

Detailed Analysis of Employers NI vs. Corporation Tax Savings

Salary LevelEmployers NICorporation Tax SavingNet Benefit
£12,570£478£750 to £1,046£272 to £568
£9,100£0Lesser compared to £12,570 salary

Employment Allowance Claim

Companies with multiple directors or employees can reduce their NI liability by up to £5,000, making the £12,570 salary even more attractive.

Recommendations for Sole Directors

For sole directors without the employment allowance, the higher salary still results in more tax savings despite the employers NI due to the corporation tax reduction.

NI Calculation Methods for Directors

Directors have two methods to calculate their NI:

  1. Monthly Allocation: Applies £758 of the allowance monthly, leading to immediate NI contributions.
  2. Annual Basis: The full allowance is considered at the start of the year, delaying NI contributions until the salary exceeds £9,100.

The annual basis is recommended for those seeking simpler administration.

Optimum Salary in Previous Years

To provide context, here's how the optimum salary has evolved:

  • 2022/23: £11,908
  • 2021/22: £8,840
  • 2020/21: £8,788

Registering and Filing Payroll Information

When paying the optimum salary, registration for PAYE is essential. For guidance on registration, refer to our blog post "How to register as an employer".

Salary and Dividends Optimization

Beyond the salary, dividends become more tax-efficient:

  • The first £1,000 of dividends are tax-free.
  • Subsequent dividends up to £36,700 are taxed at 8.75%.

A combination of salary and dividends can result in an effective tax rate of just over 6% for a total income of £50,270.

Conclusion

While the majority should consider a salary of £12,570, individual circumstances might lead to different strategies. Consulting with a Chartered Accountant is advised to ensure optimal tax positioning.

For further information on tax rates and allowances, refer to HMRC's official documentation.

To calculate your Income tax, you can use the following tool Take Home Pay Calculator .

To compare differences between two salaries, you can use the following tool Compare two salaries .

To calculate your marginal rate tax , you can use the following tool Marginal tax rates.