Each year the SAS Accounting team publishes a new guide outlining how companies can make director’s pay packages as tax efficient as possible, balancing the split between dividends and PAYE salaries to consider varied tax treatments, allowances and National Insurance.
With so many changes introduced in the 2023/24 tax year, it may be more important than ever for directors to revise their remuneration and ensure they aren't paying more taxes and exposing the business to higher obligations than necessary.
Reductions in Dividend Allowances, frozen Income Tax bands and reforms to Corporation Tax have added to the complexity – we'll explain the best solution and how much a salary adjustment could save you and your company.
Setting a Tax-Efficient Director’s Salary in 2023/24
There are some scenarios outside of the norm, such as when a director is past retirement age or has other substantial income. Still, most directors will benefit from a salary during the 2023/24 tax year as follows:
£12,570 per annum (gross) or,
£1,047 per month or £241 per week
Remaining pay should ideally be paid as dividends, based on National Insurance Contributions (NICs) both for the employer and employee.
Why pay a salary at all rather than directing all pay for company directors through dividends? There are two reasons, not least that the increased Corporation Tax rates from April 2023 mean that the tax savings associated with payroll are higher, where salaries are tax-deductible expenses.
The other contributing factor is that by paying a salary, even at a low level, the director retains their State Pension entitlement, which requires individuals to earn a wage above the Lower Earnings Limit (LEL), set at £6,396.
Director's salaries are at the company's discretion, unlike salaries for other workers, so there is no need to adhere to minimum wage legislation since the payments are made for a position of office.
National Insurance and Director’s Salary Calculations
There are two meaningful NIC thresholds: the Primary and Secondary National Insurance Thresholds. If a director earns above the Primary Threshold (PT), set at £12,570, they begin paying employee NICs.
If the salary hits the Secondary Threshold (ST), the business is liable to make employer's NICs. For this tax year, the threshold is £9,100, amounts above which incur a NIC liability of 12%.
Many companies have experienced confusion because the PT and Personal Allowance (the annual tax-free income any person can earn) are now aligned, but both figures are currently fixed at £12,570.
Keeping the director’s salary at £12,570 means that the director does not incur Income Tax since they are not earning above the Personal Allowance yet exceeds the LEL to retain State Pension eligibility without triggering the PT.
Recapping Thresholds and Allowances Against Director's Salaries
Personal Allowance = £12,570 – the maximum you can earn before incurring income tax.
Lower Earnings Limit = £6,396 – the salary you must make to qualify for the UK State Pension.
Primary NI Threshold = £12,570, the amount above which you pay employees' NICs.
Secondary NI Threshold = £9,100 – the amount above which the employer pays NICs.
Note that if the business is eligible for the Employment Allowance (EA), it can offset the employer's NIC payable on a salary above £9,100.
While the Dividend Allowance fell from £2,000 to £1,000 in April 2023 and will drop again to £500 in the 2024/25 tax year, £12,570 remains the most efficient and optimal director's salary because dividends are taxed differently from income tax.
Basic rate taxpayers pay 8.75% on dividends, increasing to 33.75% for higher-rate taxpayers and 39.35% for additional rate taxpayers – this remains lower than the comparable income tax rates, respectively 20%, 40% and 45%.
By optimising directors' salaries, the business can reduce its Corporation Tax obligations, make use of Employment Allowance claims where applicable, limit employer's NICs, and ensure directors do not pay unnecessarily high Income Tax.
Please contact SAS Accounting at your convenience for further information about any of the information within this guide or to discuss company structures where circumstances may impact the ideal balance between salaries and dividends.