Best Director Salary for Tax Savings in 2023 – 24
If you run a company, even as a sole director, there are generally three ways in which you can pay yourself: salary, dividends and a contribution to your pension from the company. The combination of those would depend on your situation and things such as company profit and how much you want to reduce company or your personal tax bill.
There is no obligation to pay a director a salary, but it makes sense in most situations. It is a legitimate business expense, and it will reduce profits for the corporation tax.
Other benefits include:
- Building qualifying years towards a state pension
- Retaining statutory payments benefits
- Making it easier to apply for mortgage.
Additionally, unlike dividends, you can take the salary even if your company makes no profit.
A director will not normally take on a salary if they have other income streams or are drawing state pension, so it is worth speaking with your accountant to confirm what is best in your circumstances.
They can only be paid if there is a profit. They attract lower rates of income tax, and no National Insurance is payable on the dividends. You also get a tax-free dividend allowance which is in addition to your tax-free allowance. This has reduced from £2,000 to £1,000 from 6 April 2023 and it will reduce further to £500 from 6 April 2024.
The main limitations to taking dividends are.
- They are paid AFTER the corporation tax has been paid unlike the salary which is tax deductible.
- They can only be paid out of profits.
- If you take a dividend that is not covered by profits, it will be treated as a director’s loan and this must be repaid.
You can also consider a pension contribution from the company as a way of remuneration.
As an employer contribution, this will not be limited by the amount of salary the director takes, only by the annual allowance which is currently £60,000 (increased from £40,000 in April 2023).
This means a company can pay into the directors pension up to £60,000 even if they are on a small salary. The main drawback of this is that you will not be able to access your pension until you are 55 years old.
What is the optimal director’s salary in the tax year 2023-24?
To decide on the salary level, you must consider the current tax and National Insurance thresholds.
|Lower Earnings Limit (LEL) is £6,396
|£6,396 per year
|You must pay yourself at least this amount to build a qualifying year for state pension.
|Primary Threshold (PT)
|£12,570 per year
|There are no Employee National Insurance contributions if your salary is at this level or under.
|Secondary Threshold (ST)
|£9,100 per year
|There are no Employer National Insurance contributions if your salary is at this level or under.
On salaries over £9,100 the company will pay National Insurance contributions at 13.8%, unless it is eligible and claims the Employment Allowance.
|Personal Allowance (regardless of age)
|£12,570 per year
Salary at £9,100 (Secondary Threshold)
The salary at the ST level – £9,100, can seem very attractive. It does not attract any tax, employee and employer NIC so you don’t need to make any deductions in payroll, and you don’t need to make liability payments to HMRC. It will also give you a qualifying year for your state pension.
However, taking into account the rise in the primary thresholds for the tax year 2023 – 2024, the salary of £9,100 is not most tax efficient.
Salary at £12,570 (Personal Allowance Level)
We will consider the savings for single director companies where Employment Allowance is not available and companies with 2 or more directors/employees where the EA business relief is available.
For the purpose of this illustration, we will assume the annual profits are £50,000 or less and the 19% rate of corporation tax will apply.
Salary Comparison Table
|£12,570 without EA
|£12,570 with EA
|Tax (tax code 1257L)
|CT saved (19%)
|CT saved when compared to £9,100 salary
|£750.28, less £478.86 NIC paid = £271.42 saved
|£659.30, no NIC paid due to EA so the saving is £659.30
Therefore the company is better off by a minimum of £271.42 when paying the director at £12,570, compared to £9,100.