Director Salary 2023/24

Hasib Howlader | 24th April 2023

Director shareholders are often recommended to extract income from their limited company via a  combination of salary and dividends. 

This typically involves paying a relatively low salary at either the Primary Threshold (PT) or Secondary  Threshold (ST) for class 1 NICs but why is this and what would be the consequences of extracting a  higher or lower salary? The following workings are designed to help you understand the various  considerations associated with these questions. 

2023/24 National Insurance Rates: 

A director salary (or director remuneration) is subject to both income tax and national insurance  contributions. Appendix 1 includes a list of key NIC thresholds & rates relevant for the 2023/24 tax  year which will be referred to throughout. 

General Considerations 

The following payroll related changes are relevant for the 2023/24 tax year: 

• The primary threshold (PT) above which employee NICs are incurred is increasing to  £12,570/year (£11,908 for 2022/23) 
• The secondary threshold (ST) is staying the same at £9,100/ year
• The employment allowance is staying the same at £5,000 /year 
• The main rate of Corporation tax rate is increasing to 25% (small profits rate or marginal relief  may apply) 

If your business has profits above £50,000 then the increase in the Corporation tax rate will increase  the tax saving from all tax deductible expenses including a director salary. This means processing a  director salary of £9,100/year could go from reducing the Corporation tax bill by £1,729 to £2,275 /  year. 

When planning for an optimal split between dividends & salary. It’s important to consider not just  the Corporation tax aspect but personal tax and national insurance contributions. For most  companies our advice will be to process a salary at the primary NIC threshold and extract the  remaining profits via dividends. This is because although paying a salary above the secondary  threshold causes the company to incur employer NIC’s at 13.8%, the cost savings of the higher  salary manages to outweigh the alternative costs of incurring both corporation tax and dividend tax. 

In practice however there can be more consideration including whether: 

• The company is incurring Corporation Tax (does it have taxable profits to reduce?
• The company has distributable profits (if not there won’t be the option of paying dividends) 
• It’s advantageous / disadvantageous to increase your personal income level. Including the  impact on student / postgraduate loan repayments or marginal thresholds such as for higher  rate tax or child benefit repayment. 
• You have income from multiple sources such as rental income or income from multiple  companies 
• Whether you have unused finance credits which could be utilised against tax on salary income
• The impact on payments on account to HMRC 
• Timing of tax payments & impact on business and personal cash flow 

If you require bespoke advice, please contact us however for our clients the most common position  is as follows. If the business does not have to pay employer’s NIC’s then we recommend a higher  director salary set at the primary threshold. We don’t usually recommend exceeding the primary  threshold because above this point employee NICs are incurred which normally outweigh the  associated tax saving. Your business will not have to pay employers NICs on the director salary if the  business is eligible and not fully utilising the allowance on other staff. You’ll need around £479 of  employment allowance per director to cover the employer’s NICs on a director salary set at the  primary threshold. 

Where the employer does not have an employment allowance the business will have to pay HMRC  the employer’s NICs incurred on the portion of director salary above the primary threshold. For  simplicity you may therefore prefer to pay a salary at the secondary threshold of £9,100/year  because this will generally avoid the need of the company to arrange any HMRC PAYE payments to  HMRC (unless there are other staff as in which case the business will likely be making these  payments anyway). As will be shown below, processing a ST salary instead of a PT salary where no  EA is available can result in losing out on £248 or £464 / year depending on whether the company  incurs corporation tax at 19% or 25%. As a result you may therefore still want to pay a £12,570  director salary even when the business does not have EA available. 

Our general advice is therefore to set a director salary as follows: 

• The primary threshold of £12,570/year – where the business is eligible for the employment  allowance (& it’s not being fully utilised) 
• The primary threshold of £12,570/year – where the business is not eligible for the employment  allowance but is already making monthly payments to HMRC for PAYE deductions on other  staff 
• For a single director company: 
  • The secondary threshold of £9,100/year – where the business wants to keep the payroll  as simple as possible and reduce any administrative burden 
  • The primary threshold of £12,570/year – where the business is profitable and wants to  maximise on tax efficient extraction from the company. 

In the appendices we’ve included calculations of how a company with £50,000 of taxable profits  could distribute salary & dividends. We’ve pre-prepared calculations based on a variety of salary &  dividend options but for comparative purposes have always shown the full distribution of £50,000.  In each scenario the net position is equivalent the director is left with after payment of their  personal tax. 

We’ve prepared workings based on a 19%, 25% and 26.5% corporation tax rate. The reason for the  26.5% calculation is this will be the effective tax rate on business with profits between £50,000 and  £250,000. 

Comparison 

The below tables summarise our results under different corporation tax rates. 

The 19% Corporation tax rate applies to businesses with group augmented profits below £50,000 

The 25% Corporation tax rate applies to businesses with group augmented profits above £250,000 

The 26.5% is the effective Corporation tax rate which applies to businesses with group augmented  profits between £50,000 and £250,000 

We therefore recommend the primary threshold £12,570 for tax efficiency but note that is more  valuable where the business is eligible for employment allowance. Where the business does not  qualify for employment allowance (EA), it is still beneficial to pay a director salary at the primary  threshold rather than the secondary threshold.

Nevertheless paying at a director salary at the secondary threshold still obtains significant tax savings over no director salary at all. 

The increase in Corporation tax leaves the optimal salary level unchanged (i.e. the rating order  remains the same in all three tables) however as Corporation tax increases the benefit of a director  salary also increases. 

Other considerations: 

For the purposes of a fair comparison we’ve shown the full destitution of dividends in each scenario however in practice you may also plan to distribute dividends over multiple tax years particularly where you are close to a change in marginal tax rate. 

In appendix 5 we’ve included workings for paying a director salary above the primary threshold and choosing to incur employee NICs. This isn’t usually recommended but there are some scenarios such as where there are two company directors/shareholders where a higher salary could be advantageous. 

These workings are designed to assist in understanding the various considerations that go into determining an optimal director salary, if you require bespoke calculations for your business please let us know. 

Appendices: 

Appendix 1: 2023/24 National Insurance Rates: 

The following has been extracted from https://www.gov.uk/guidance/rates-and-thresholds-for employers-2023-to-2024 

Other NI categories & conditions can apply. 

The following NIC rates are relevant for the 2023/24 tax year and will be referred to below: 

Appendix 2: Calculations using a 19% Corporation Tax Rate 

A: Nil Director Salary 

In this instance the company incurs Corporation tax on all £50,000 and is left with £40,500 of distributed profits available as dividends. The director incurs £2,356 of personal tax and is left with £38,144 this represents the amount distributed (£40,500) less the personal tax incurred) 

B: Director Salary at the Secondary Threshold of £9,100 

In this instance the company incurs Corporation tax on all £40,900 and so saves corporation tax of £1,729 (£19% of the director salary). The amount that’s available to distribute as dividends has however been reduced. 

The director incurs £2,508 of personal tax and is left with £39,721 this represents the amount distributed (£42,229) less the personal tax incurred. 

The net position has improved by £1,577 from having a nil salary although some of this would be offset by the cost of processing a payroll scheme (where a payroll scheme would not otherwise be run). 

C: Director Salary at the Primary Threshold of £12,570, EA qualifying (no employer’s NIC liability) 

In this instance the company incurs Corporation tax on £37,430 of profits and is left with £30,318 of distributed profits available as dividends. 

The director incurs £2,565 of personal tax and is left with £40,323, saving an additional £602 over keeping the salary at the secondary threshold. 

D: Director Salary at the Primary Threshold of £12,570, Non-EA qualifying (employer’s NIC liability) 

Where no employment allowance is available the employer incurs 13.8% NICs on the amount of salary above the secondary threshold. The additional salary above the threshold is £12,570 – £9,100 = £3,470.00  

And £3,470 at 13.8% = £479 

The director incurs £2,531 of personal tax and is left with £39,969. 

Compared with the secondary threshold salary of £9,100 which gave a net position of £39,721, there is an additional £248 saving. 

Appendix 3: Calculations using a 25% Corporation Tax Rate 

A: Nil Director Salary 

B: Director Salary at the Secondary Threshold of £9,100 

C: Director Salary at the Primary Threshold of £12,570, EA qualifying (no employer’s NIC liability) 

D: Director Salary at the Primary Threshold of £12,570, Non-EA qualifying (employer’s NIC liability) 

Appendix 4: Calculations using a marginal 26.5% Corporation Tax Rate 

A: Nil Director Salary 

B: Director Salary at the Secondary Threshold of £9,100 

C: Director Salary at the Primary Threshold of £12,570, EA qualifying (no employer’s NIC liability) 

D: Director Salary at the Primary Threshold of £12,570, Non-EA qualifying (employer’s NIC liability) 

Appendix 5: Salary above PT 

Where the employment allowance is available you may consider paying a salary above the primary threshold. 

Take for example a company with two directors and no members of staff. 

The employment allowances is £5,000 which would mean each director would have to incur more  than £2,500 of employers NIC on their salary before the EA is fully utilised. 

Employer’s NIC is incurred at 13.8% above the secondary threshold of £9,100 and so this would  happen when the director receives a salary of £27,216 

£27,216 – £9,100 = £18,116 and 

£18,116 x 13.8% = £2,500 

The reason we don’t usually recommend a salary of £27,216 is because previously the employee  NICs incurred outweigh the benefit as can be seen below. Of course £50,000 of (pre-salary) taxable  profits wouldn’t be sufficient for two directors at this rate however for a consistent comparison  we’ve included the salary & NIC figures for just a single director in this scenario. 

Our findings were that: 

• At 19% Corporation Tax there is a £866 saving with a primary threshold £12,570 salary

• At 25% Corporation Tax this saving reduces to just £64. 

• At 26.5% Corporation Tax the tax efficiency is reversed and it’s £137 cheaper to pay a salary at  £27,216 than the primary threshold. 

As a result where a business has two director-shareholders, serious consideration can be given to reporting salaries above the primary threshold when 25% or 26.5% Corporation tax would otherwise be incurred. 

The following table compares a £12,570 primary threshold with the £27,216 salary under three C.T. rates. 

Individual workings below. 

A: 19% Corporation Tax Rate: Director salary of £27,216 (fully covered by employment Allowance) 

B: 25% Corporation Tax Rate: Director salary of £27,216 (fully covered by employment Allowance) 

C: 26.5% Corporation Tax Rate: Director salary of £27,216 (fully covered by employment Allowance)