Director’s Salaries for 2023/24

What is the optimum director’s salary for 2023/24?

The optimum director’s salary for 2023/24 is £12,570 per annum. The reason for this is all down to the National Insurance (NI) rates.

The lower earnings limit for NI in 2023/24 is £6,396 per annum. If you earn over this amount it will count as a qualifying year for your future state pension.

The primary earnings limit for NI in 2023/24 is £12,570 per annum. If your annual salary exceeds this amount, then you as an employee of your business will need to pay NI contributions.

The secondary earnings limit for NI in 2023/24 is £9,100 per annum. If your annual salary exceeds this amount the employer (your business) will need to pay NI contributions.

The optimum in 2023/24 is to pay £12,570 but not a penny more. This ensures the taxpayer qualifies for the state pension but does not need to pay any employee contributions. Yes, you have read this correctly! You can qualify for a state pension without making any personal NI contributions.

Why £12,570 – isn’t that the same as the personal allowance?

The personal allowance and the primary NI threshold have now been aligned. They are both now £12,570.

The employees NI threshold was increased to £12,570 in July 2022. As the increase only commenced part way through the tax year, there was a hybrid threshold in 2022/23 of £11,908.

Why not pay a £nil salary?

A company can pay a director (who is also a shareholder) through either salaries or dividends.

* Any salary paid is a tax-deductible expense.
* Any dividends paid are not a tax deductible expense for the company (they are paid from the net profits of the business), therefore only profitable companies can pay out dividends. 

When is a £nil salary advisable?

The optimum directors salary 2023/24 should be £12,570 per annum only if the director has tax allowances available.

In situations, where the director has other income such as pension income, another salary, rental income, it may be advisable to pay a £nil salary. Also, if the individual is already at pension age and it is no longer important to have another qualifying year.

Under these circumstances, it is important to seek specialist tax advice, which we can offer.

Why not pay higher salaries?

All taxpayers have personal allowances in which they can earn income tax free. As soon as these allowances are used up tax rates are applied.

When income exceeds £12,570 per annum, both national insurance taxes and income taxes are applied.

The NI and income tax rates combined are significantly higher than the dividend tax rate. Even when accounting for the corporation tax reduction on the salaries, paying dividends is still usually more tax efficient.

When to pay more than the optimum director’s salary?

In some circumstances it may be advisable to pay in excess of the optimum directors salary, for example if you are doing Research & Development (R&D) – if this is the case, please discuss with your Account Manager who will be able to help

Dividends can only be paid out if the company has profit and loss reserves. If the company has made losses in the past it may not be possible to pay dividends. Higher salaries may be the only option.

Why not pay a director’s salary of £9,100?

In previous years it has always been recommended to pay optimum salaries up to the secondary threshold. In 2023/24 this threshold is £9,100.

Paying up to the secondary rate avoids PAYE, employees NI and employers NI.

Our recommended optimum salary of £12,570 will be liable to employers NI but it saves more in corporation tax.
 
The extra employers NI totals £478 (calculation is £3,470 at 13.8%) but the corporation tax saved is at least £750. (calculation is £3,470 at 19% + £478 at 19%).

When should you pay a director’s salary of £9,100?

Paying the optimum directors’ salary of £12,570 does incur employers NI of £478. This will need to be paid to HMRC.
 
Many businesses would rather avoid this extra burden of making additional tax payments.
 
To avoid making the payments, the salary needs to be reduced so that no employers NI is due. To achieve this, the optimum director’s salary should be reduced to £9,100.
 

Can I claim the employment allowance?

The employment allowance allows a company to reduce their employers NI liability by up to £5,000 per annum.

Unfortunately the employment allowance is not available to all businesses. A company must have multiple directors or employees to be able to make the claim.

Should an employment allowance claim be available, then the employers NI of £478 would reduce down to £nil.
 
This increases the tax savings of paying an optimum directors’ salary of £12,570.
 
When compared to a salary of £9,100, the tax saved is between £659 and £919. (calculation is £3,470 at 19% or 26.5%).

What is the optimum director’s salary for a sole director in 2023/24?

Sole directors without any other employees don’t benefit from the employment allowance. This results in employers NI of £478 being payable.
 
The logical answer would therefore be to pay the lower salary of £9,100. This is below the secondary threshold, so no employers NI is payable.
 
We don’t recommend this. The higher optimum director’s salary of £12,570 saves corporation tax of at least £750, which increases to £1,046. (Depending on the corporation tax rate applied).
 
There are two methods for calculating directors NI.
 
The first method takes the annual allowance of £9,100 and allocates £758 to each month. This means that with a salary of £1,047.50 a month the employers NI is payable in month 1. As a result, taxes would be payable to HMRC from the start of the tax year.
 
The second method is to use the annual calculation. The allowance of £9,100 is applied at the start of the tax year. It is only when the director receives over £9,100 that NI becomes payable. With a monthly salary of £1,047.50, this will occur at month 9.
 
In both methods the employers NI of £478 would be payable. The second method just delays the payments until the end of the tax year.
 
For sole-directors concerned about the added burden of paperwork, the annual calculation is recommended. Payments to HMRC are condensed into less months at the end of the tax year.

How to optimise salary and dividends for directors in 2023/24?

When income exceeds £12,570, dividends are more tax efficient than additional salaries. This is because the dividend tax rates are lower than PAYE & NI tax rates.

Clearly an annual salary of £12,570 is not high enough for most individuals to live off. The additional income is then paid to the director as dividends, as long as the director is also a shareholder.

After paying a salary of £12,570, the first £1,000 worth of dividends are tax free.  

The director has therefore now earned £13,570 all of which is completely tax free.

The next £36,700 of dividends are taxed at 8.75%. This takes us up to the top level of basic rate, which is £50,270 for 2023/24.

Dividend tax rates for higher rate taxpayers are taxed at 33.75% and for additional rate taxpayers it is 39.35%.

Conclusion – optimum director’s salary 2023/24

The majority of owner managed businesses should pay themselves a salary of £12,570. However, we do expect a minority of sole director businesses to pay the lower amount of £9,100. We then recommend additional income is paid as dividends.

A director who earns £50,270 through a combination of salary and dividends will pay personal taxes of £3,211. This is therefore an effective tax rate on the £50,270 income of just over 6%.

There are numerous assumptions made when concluding the above figures. To calculate your optimum director’s salary 2023/24 you must look into your individual circumstances.