We get asked quite a lot of questions about the optimum limited company director’s salary and why we recommend the amount we do. Here we explain the multiple factors at play when we arrive at a figure.

What do we take into account when calculating the recommended salary?

It’s a complex calculation to figure out what’s best when you’re a company director. Our calculations take account of:

• National Insurance (NI) obligations – for the company and the individual
• Tax allowances – you can currently earn up to £12,570/year without paying tax
• Corporation Tax implications – what impact will the salary have on Corp Tax?

The National Insurance part of the calculation

There are three different NI thresholds you need to be aware of.

The first is the minimum you need to earn to qualify for the year to count towards your future state pension – the lower earnings limit. (State pensions are calculated based on how many years you have paid in.) This is £6,396 for 2022/23, so you need to earn this or more to get your qualifying year.

The second is the primary earnings limit, which is £11,908 in 2022/23. If your salary is higher than this, you’ll be liable for personal (employee) NI contributions.

The third is the secondary earnings limit – which is the point after which your company is liable for employer’s NI contributions. This year that’s £9,100 for the year.

Our director’s salary strategy for 2022/23

There are two salaries we might recommend for companies with only one director on payroll this tax year, depending on a few things. For the majority of clients, we suggest £9,100 because it avoids the admin of paying regular Employer’s NI contributions in return for a pretty small financial gain.

If you’re willing to have the admin of making the extra payments, we might suggest £11,908 as your director’s salary. You’ll be liable for Employer’s NI of £422 on a salary of this amount, but you’ll save Corporation Tax of £613, leaving a gain of just £191, reducing to £175 accounting for the tax you’ll pay on dividends. In addition, you have to pay the NI contributions during this tax year, but the saving isn’t made for another nine months after the year end, because that’s when you’ll pay your Corporation Tax.

As a result, we mainly recommend directors take a salary of £9,100 for 2022/23 which avoids the burden of paying HMRC the PAYE and NI due on larger amounts.

If your company has two or more directors on payroll we’ll recommend a different strategy. This is because companies with more directors qualify for employment allowance which means your employers’ NI liability is reduced by up to £5000/year. This means the optimum salary for a company with multiple directors is £11,908 per director, saving £422 NI contributions and a further £533 in Corporation Tax (compared to a salary of £9,100).

We’ll review our salary strategy in March 2023 and make any adjustments necessary based on the relevant information at that point.

Why not pay no salary and take all money out as dividends?

Directors’ salaries are allowed as an expense to come off profit, saving you 19% in Corporation Tax. Dividends do not get this benefit. By paying £11,908 as a salary, the company saves £2,262 in Corp Tax. And by paying a salary you also get the qualifying year for your future state pension.

Why not pay a higher salary?

As a director you can choose to take a higher salary, but you will end up with less money overall as when you add up the NI and personal tax implications, they will be more than the 19% Corporation Tax liability you have to pay on profit. That’s why paying the optimum salary and taking the remainder as dividends is the right balance.

Questions?

If you have any questions about the optimum limited company director’s salary for 2022/23, speak to your usual TLC contact in the first instance.