Although we've mentioned this briefly in our guide to Preparing for the 2022 Tax Year, we've created this more detailed post to explain how the ideal director's salary is calculated for the 2022/23 tax year.
In the year ahead, the optimal payroll structure for company directors with the greatest tax efficiency is £11,908 per year, £992 per month or £229 a week.
This figure was slightly different in the original SAS Accounting article but has been adjusted because of the changes announced by Rishi Sunak in the Spring Statement on 23rd March!
How to Determine the Best Director's Salary for the 2022/23 Tax Year
Directors usually pay themselves through their businesses via a monthly PAYE salary, dividends, or both.
From a tax perspective, the latter option is favourable and should be capped at £11,908 for the tax year starting on 6th April 2022.
Further payments should be made as dividends to minimise tax liabilities without falling foul of National Insurance underpayments, which would mean you might not be eligible for the State Pension in the years ahead.
The calculation considers several factors:
- The Lower Earnings Limit (LEL) is £6,396. All salary payments above this threshold qualify for future State Pension entitlements.
- Adjusting for the recent changes, the Primary Earnings Limit (PEL) for National Insurance (NI) has increased to £11,908 - we'll explain how we reach that figure shortly! Any payments above and beyond that are liable for Employee's NI contributions.
- This tax year, the Secondary Earnings Limit (SEL) is £9,100, so if your salary goes any higher, the business has to pay Employer's NI.
By fixing your salary at the top of the PEL, you protect your State Pension eligibility and forgo any requirement to pay Employee's NI.
Accounting for National Insurance Changes During 2022/23
Originally, we'd have recommended a maximum salary of £9,880 to coincide with the relevant NI thresholds.
However, those limits will change from 6th July 2022 - splitting the tax year into three months at a lower £9,880 PEL and the remainder at the higher level.
From July, the PEL is increasing to £12,570, so employees begin paying NI at the same time as they become liable for Income Tax.
The idea is to ensure that lower earners that don't earn a sufficient salary to pay Income Tax aren't penalised with NI contributions even though they fall below the first tax bracket.
As a result, the real NI threshold for 2022/23 is £11,908 - but will bump up to £12,570 next tax year, any further changes notwithstanding.
It's important to pay a proportion of a director's remuneration via salary because the payments are tax-deductible at the 19% Corporation Tax rate.
Dividends aren't accounted for in the same way as they constitute a share of profits rather than a company expense.
Therefore, provided you don't pay yourself a salary above the PEL, you'll save £2,262 in Corporation Tax while retaining the benefits we've explained above.
Why Not Match Director's Salaries to the Secondary Earnings Limit?
There are two relevant thresholds when it comes to NI:
- The PEL (£11,908) is the point at which employees start paying NI.
- The SEL (£9,100) is the threshold beyond which the employer is liable.
It might seem obvious to pay a salary at the SEL and avoid Employer's NI - but the trade-off is advantageous to the business and the owner-director.
That's because of the tax-deductible nature of salaries we'd discussed.
By accepting the Employer's NI liability of £422 (based on the £2,808 salary at a 15.05% contribution), you save £613 in Corporation Tax by claiming a higher tax-deductible salary expense.
We hope this guide from the SAS Accounting team is helpful and clearly explains why we've recommended a director's salary of £11,908 for the forthcoming tax year!
If you have any queries or need any support negotiating the changes confirmed in the Spring Statement, please get in touch at your convenience for professional accountancy advice.