What's The tax Efficient Wage For Director?
A Salary should generally be taken but is often kept to a low amount to keep under the National Insurance Threshold.
There are two main optimal salaries that you need to consider (depending on other factors the salary may change).
Your Salary is a tax deductible cost so the company will receive tax relief on the payments.
Please Note: The employment allowance has increased to £5k for 22/23 tax year. It is also worth noting that the Employment Allowance isn’t available to companies where the only person on the payroll is a director, i.e. ‘Sole director employee’ limited companies.
Optimal Scenario 1
If there are two or more employees within the company and the Employment Allowance is available, a salary of £992.33 per month (£229 per week/£11,908 per year). This is based on 3 months at the current threshold and 9 months on the new higher primary national insurance threshold increasing from July.
For both salary types, it will be take the rest of your remuneration in the form dividends.
- No Tax
- No employee’s NI
- Employer annual NI = £422.00 (rounded – not payable with £5k Employers Allowance)
Optimal Scenario 2
If you are a sole director of a company, or the employment allowance has been used/not available, it is common to use £758.00 per month (£175 per week/£9,100 per year) as a salary.
This is because:
- You will not pay Employer's National Insurance (NI)
- You will not pay Employee's National Insurance (NI)
- You will still earn National Insurance Credits for your state pension
- It is less than the Personal Allowance threshold
Optimal Scenario 3
Gross of £12,570 (PA Rate) = £1,047.50 per month / £241.00 per week. (This would be the tax efficient wage from July where you incur some employee national insurance where the corporation tax savings outweigh the cost of paying employees national insurance.
- No Tax
- Employee annual NI = £357.00 (rounded) payable (will kick in towards end of tax year)
- Employer annual NI = £523.00 (rounded – not payable with £5k Employers Allowance)
What Is The Employment Allowance?
The Employment Allowance allows employers to reduce their Employer's National Insurance by up to £5,000 each tax year.
If you have not claimed the employment allowance and you are eligible, you can claim back the previous 4 tax years resulting in a massive saving in Employer's National Insurance!
For any unclaimed allowance, you can ask HMRC to use this to pay any tax or National Insurance you owe which includes VAT and Corporation Tax!
We understand that every business might have a different way of running or might be taking on different projects and this section is for you!
- If you are running projects which involved R&D your salary can be included within the R&D claim, so taking a higher salary will result in a bigger claimed being awarded!
- Depending on how many employees, you can take a monthly salary to fully utilise the Employment Allowance, which can result in a higher/lower salary - your accountant should be able to calculate your optimal salary for you.
- At a minimum, you should be taking £520 a month (£6,240 a year) so you can receive a national insurance credit which will give you access to your state benefits including a pension
This article was written for Construction Insider and Saint Financial Group. Saint is a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.
Saint provides the luxury of free business consultancy for all of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!