Clare Slattery, tax director at Streets Chartered Accountants, considers the most tax efficient salary for directors.
For many years, director shareholders in limited companies have often been advised to take a small salary, at a rate to retain access to state pension credits and other benefits, and then supplement their income using dividends. Looking at the individual and the company together, this is a very tax effective route.
As the gap grew between the Personal Allowance for Income Tax and the Primary Threshold, where National Insurance Contributions (NIC) are paid by employees, debate has grown over the most tax efficient level of salary with most directors still taking a salary at a level where they don’t pay any contributions but receive the credits.
Many of you will remember the turmoil of the changes to NIC during the 2022/2023 tax year but 6 April 2023 saw new rates coming in and hopefully some stability.
The main change going forwards is that the Primary Threshold has been aligned with the Personal Allowance so a salary of £12,570 may now be paid with usually no deductions being made. Depending on the other income of the director, there could be no change to their usual tax liabilities.
However, the level of salary at which a company pays employer’s NIC has remained at £9,100 per year and so, if the salary is increased to £12,570, a liability of £478.86 will arise for the employer.
Although an additional cost on the face of it, the additional Corporation Tax savings will still result in a net saving assuming the dividend is reduced by the same amount.
With a Corporation Tax rate of 19%, the savings can be minimal but with the new rules applying for those from 1 April 2023 increasing the tax rate for some companies to 25% and, in certain circumstances, an effective tax rate of 26.5%, the savings are greater.
Furthermore, these additional NIC costs for the company could be covered by the Employment Allowance thus further increasing the savings.
If eligible, this allowance covers the first £5,000 of employer’s NIC. In order to claim the allowance, the employer must have at least one employee (not the director) or two directors on the payroll, so any company with only one director on the payroll is not able to claim the allowance.
There are other factors to take into consideration, such as other income received by the director, but it is worth considering giving yourself a pay rise!
See this column in the May edition of East Midlands Business Link Magazine here.
