12 Jul Directors’ Salaries 2022
How much is the Optimal Director’s Salary in 2022/23
The optimal salary for company directors is unusually a little different this year and has been adjusted because of the changes announced by Rishi Sunak in the Spring Statement on 23rd March, just after we’d prepared our annual directors salary guide for 2022-2023!
Very broadly speaking:
- The optimum salary for a sole director in 2022/23 is £9,100.
- The best salary if there are two or more directors is £11,908.
Increases to the rate of National Insurance and Dividends along with the increased threshold for National Insurance from 6 July 2022 and the increase in the employment allowance, have created some confusion for directors and accountants alike!
When working out how much to pay yourself, you need to consider National Insurance contributions as an employee and employer, how many people there are in the business, tax allowances for dividends and for income together with the corporation tax relief for employee salaries. Importantly, it’s important to remember that one approach does not fit all and your own personal circumstances should be taken into account. Be sure to seek professional advice which considers your complete position, both personal and business.
The personal allowance for 2022/2023 tax year is £12,570 which means you can pay yourself this level of salary without any tax being due. However, you also need to consider National Insurance contributions.
There are two relevant thresholds when it comes to NI:
- The Primary Earnings Limit (£11,908) is the point at which directors start paying National Insurance
- The Secondary Earnings Limit (£9,100) is the threshold beyond which the employer is liable.
From 6th April 2022 – 5th July 2022 employees can earn £823 per month before paying national insurance
From 6th July 2022 – 5th April 2023 employees can earn £1,048 per month before paying national insurance.
Monthly salary payments at these amounts will be equal to the primary earnings limit £11,908 so no National Insurance will be payable by the director although the company will be liable to Employers National Insurance.
Optimum amounts for Directors
Taking into account the above thresholds, the optimum salary for a sole director in 2022/23 is £9,100. (£758.33 per month)
- It’s at the secondary earnings threshold so your company won’t need to pay employer’s NI on it
- This salary is lower than the primary threshold, so you won’t need to pay employee’s NI
- You will still earn NI credits, earning credits towards your state pension
- This is less than the tax-free Personal Allowance threshold, i.e. £12,750
- You cannot claim Employment allowances as a sole director. A sole director cannot claim the Employment Allowance
- The salary is deductible for corporation tax purposes (generating a tax saving for the company about £1,729) (£9,100 x 19%)
If considering paying a salary at the Primary Earnings Limit (£11,908) as this still offers benefit to both the director and the company. The director’s salary is tax deductible, saving corporation tax of £2,263 (£11,908 x 19%). The company is ineligible to claim Employment Allowance so will incur Employer’s National Insurance liability of £422 (based on the £2,808 salary difference at a 15.05% contribution). The total corporation tax saving based on receiving the higher salary becomes £2,263 – £1,729 = £534. There is also the Employers’ National Insurance cost which is also corporation tax deductible, saving a further £80.18. (£422 x 19% = £80). The total savings in corporation tax are therefore £534 + £80 = £614 by claiming a higher tax deductible salary expense.
for limited companies with two or more directors or one director and at least one other employee, the most efficient salary in 2022/23 is £11,908. (£823 per month for April 2022 – June 2022 then £1048 per month for July 2022 – April 2023)
Having two or more directors on the company payroll means that you’re eligible to claim the Employment Allowance. In 2022/23 employers who are eligible to do so, can use the Employment Allowance to claim up to £5,000 in order to cover the costs of Employer’s National Insurance, increasing from £4,000 in recent years. To be eligible, employers must have at least one employee, or two directors, on the payroll, and the directors must not have another company that is claiming the Employment Allowance already. This means that sole directors can’t claim the allowance, which is why the optimum salary is a bit different for them.
- It’s at the primary earnings threshold so you won’t pay employee’s National Insurance above this limit
- Your company will incur employer’s National Insurance on your salary but if eligible, will be able to claim the Employers National Insurance allowance to offset against the cost
- You will still earn National Insurance credits towards your state pension.
- This is less than the tax free Personal Allowance threshold, i.e. £12,750, leaving some of your personal allowance free for other income
- The salary is deductible for corporation tax purposes (generating a tax saving for the company about £2,263) (£11,908 x 19%).
Further payments should be made as dividends to minimise tax liabilities without missing out on National Insurance contributions, which would mean you might not be eligible for the State Pension in the years ahead.
If you have any questions about your salary or dividends, please get in touch and we will be happy to help!