It’s the start of a new tax year – and therefore time to do some number-crunching to work out the optimal salary for company directors.
The Office of Tax Simplification has come up trumps this year and changed the rate of NIC part way through a tax year – to er……. not simplify matters!
So where does this leave us for the company director who want to pay him/herself tax efficiently?
We need to look at 2 scenarios – the company which has only one director and therefore cannot claim the NIC Employment Allowance – and the company which has 2 directors, or a director and at least one employee and is able to benefit from the increased Employment Allowance.
Single Company Director -no other employees earning over the Lower Earnings Limit (LEL) for NIC
You have 3 choices!!
- To qualify for NI benefits (state pension etc) you need to earn at least the LEL for NIC – which this year is £6,396 pa (£533 pm)
- The employees NIC threshold has increased to £12,570 – but only from July 2022. Up to 5 July it is £9,880. Over the year, this gives an annual threshold of £11,908.However, the employer’s NIC threshold for the year is lower at £9,100, so if you want to avoid having to pay any NIC at all in the year, your optimal salary is £9100pa (£758pm)
- As the rate of employers NIC is 15.05% this year, and the rate of corporation tax at least 19%, then you will be better off overall if you pay the higher salary of £11,908pa (£992pm) – as you will save more in corporation tax than you will pay in NIC.The saving though is only £191 over the year. You will have to weigh up whether this tax saving is worth the hassle of having to remember to pay the employers NIC over to HMRC towards the end of the tax year.
Company with more than one director, or one director and at least one employee earning more than the Lower Earnings Limit for NIC
- With more than one employee the company should be able to claim the NIC Employment Allowance. This has increased in the year to £5,000 and gives a company a credit against the first £5,000 of employers NIC due – often resulting in a small company not actually physically paying over any employers NIC to HMRC.
In this situation paying the higher salary of £11,908 would be the optimal level, as the employers NIC due is covered by the allowance. The additional corporation tax saving from paying £11,908 as opposed to £9,100 is £533.
Both these levels of salary are below the personal allowance of £12,570, so assuming no other income in the year, there would be no income tax due. Additional income could be drawn from the company as dividends. The first £2,000 of salary remains tax free. Tax rates of dividends this year have also increased and are 8.75% for basic rate taxpayers, and 33.75% for higher rate taxpayers.
The above rates are illustrative only and assume no other income from other sources in the year. You should always take personal tax advice as to the optimal level of salary for you, given you own personal circumstance.
For more information and advice, please contact Rosie Forsyth.