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.

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.

From a tax perspective, paying a director's salary through the business 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.

A salary calculation of £11,908 considers several factors:

• The Lower Earnings Limit (LEL) is £6,396. All salary payments above this threshold qualify for future State Pension entitlements.
• The Primary Earnings Limit(PEL) for National Insurance (NI) has increased to £11,908 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 any salary higher than this amount, the business must pay Employer's NI.

By paying a director's salary at the top of the PEL, you protect your State Pension eligibility and waive any requirement to pay Employee's NI.

• National Insurance Changes During 2022/23

NI threshold 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. This 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 this will change to £12,570 next tax year, subject to any further government changes.

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.

If a director pays themselves a salary of £11,908 per annum, equivalent to the PEL, you'll save £2,262 in Corporation Tax while retaining the benefits we've explained above.

It might seem attractive to pay a director's salary at the SEL and avoid Employer's NI - but the trade-off is beneficial to the business and the owner-director. That's because of the tax-deductible nature of salaries discussed above. By accepting the Employer's NI liability you will save in Corporation Tax by claiming a higher tax-deductible salary expense.

We hope you find this guide from the Giltinan & Kennedy LLP team helpful and it clearly explains why we've recommended a director's salary of £11,908 for the forthcoming tax year!