A tax efficient salary and dividends are how many directors of owner managed businesses choose to pay themselves. Many directors structure their remuneration this way is to maximise tax efficiency by minimising the tax payable on the money they withdraw from their company.
What’s the Most Tax Efficient Director’s Salary in 2021/22?
Sole directors – For sole directors getting paid through their limited company’s payroll, the most tax efficient director’s salary is £8,840 per annum (or £736.66 a month).
Two or more directors – The most efficient salary for 2 or more directors in 2021/22 is £9,568 per annum (or £797.33 per month).
Why not just pay a salary?
A company director can be remunerated by a salary only like a normal employee, however it wouldn’t be tax efficient in most cases.
As directors are office holders of a company, minimum wage rules do not apply and thus the salary can be set at a level to utilise an individuals tax allowances.
Why not just pay a dividend?
A company director if also a shareholder could be paid by dividends only, however again it wouldn’t be tax efficient. Dividends are not a deductible expense for tax purposes whereas a salary is. Therefore not receiving any remuneration by way of salary would mean an opportunity to save Corporation Tax on a salary would be missed.
How is the tax efficient salary determined?
There is a lot to consider when determining a the tax efficient salary. The main areas to consider are outlined below:
National Insurance Contributions (NICs)
If a director’s salary is above a specific National Insurance threshold:
- The business has to pay employer’s National Insurance Contributions.
- The director has to pay employee’s NI.
The thresholds for employer’s and employee’s NI are different and are shown in the table below:
|Weekly NI Threshold 2021/22||Monthly NI Threshold 2021/22||Annual NI Threshold 2021/22|
|Lower Earnings Limit (LEL): Employees earning less than this limit will not incur NI, but also won’t accrue NI benefits, such as qualifying payments towards their State Pension.||£120||£520||£6,240|
|Primary Threshold: This is the point at which employees start paying NI. Earning below this, but above the Lower Earnings Limit still does not incur NI, but employees will earn NI ‘credits’, and accrue NI benefits.||£184||£797.33||£9,568|
|Secondary Threshold: Employers pay NICs at a rate of 13.8% on salary payments above this threshold.||£170||£736.66||£8,840|
Qualifying for the State Pension
Taking a salary which is higher than the Lower Earnings Limit (LEL) (£6,240 per year, in 2021/22) allows directors to build up qualifying years for their State Pension.
If a director’s salary is above the LEL but below the Primary Threshold then they will accrue all the benefits of NI, without actually paying it.
Tax-free Personal Allowance on your director’s salary
The Personal Allowance is the amount an individual is allowed to earn before having to start paying Income Tax.
In 2021/22, the Personal Allowance is £12,570.
Eligible employers can use the Employment Allowance to claim up to £4,000 in order to cover the costs of employer’s National Insurance.
To be eligible, employers need to have at least 1 employee or 2 directors on the payroll which means that sole directors cannot claim the allowance – this is why the most tax efficient salary is different for sole director companies.
If you have any questions on the most tax efficient remuneration structure for your Limited Company then please get in touch with one of the team on 01228 904 904.