Director Salary 2024/25

Dominic Barrow | 24th April 2024

Planning an optimal director salary for 2024/25

This blog is an update of the article written on 2023/24 available here where we consider the process for choosing an optimal director salary.

Entering into 2024/25 certain key thresholds have remained unchanged including

• Primary Threshold
• Secondary Threshold
• Personal allowance

As a result the general findings are that most directors will choose £12,570 as the optimal director salary for the 2024/25 tax year however as with 2023/24 some may choose a £9,100 salary due to a lower administrative burden for a relatively small loss of tax/nic savings.

Significant changes for 2024/25 include:

• Primary NIC rate reducing to 10%
• Dividend allowance reducing to £500

Corporation Tax rates

Small profits rate: 19% for profits up to £50k/year

Main rate: 25% for profits above £50k/year

Marginal Rate relief is provided on profits between £50k-£250k

In the workings below we’ve considered the tax savings of a director salary for company suffering both the main and small profits rate.  As a result of marginal rate relief an effective marginal rate of 26.5% usually occurs on profits between £50k and £250k.  We’ve therefore also considered the impact of a company occurring a marginal 26.5% corporation tax rate.

Salary levels

We’ve considered annual salaries at the following key rates

• £9,100 the secondary threshold
• £12,570 the Primary threshold & Personal allowance
• £27,216 the maximum salary that two directors could each receive and incur employers NICs fully covered by the annual employment allowance.
• £44,090 per the alternative scenario provided

Impact on full year for 2024/25:

The following table compares how to extract £50,000 of pre-tax profits from a company using three different combinations of salary and dividends.  The Net position represents the GBP £ extracted by the Director/shareholder after deduction of all taxes.  It does not consider the impact on personal payments on account.

C.T. Rate – 19% Corp. Tax:

C.T. Rate – 25% Corp. Tax:

C.T. Rate – 26.5% Corp. Tax:

Workings Example:

To demonstrate how we calculated the above figures, we’ve included below the workings for the final row.

The extraction of £50,000 of pre-tax profits where suffering marginal tax of 26.5% and paying a salary of £27,216

Company Profits:

Director’s Income:

Director’s personal tax

Director’s Tax Computation

Director’s Class 1 Primary (Employee) NICs:

Conclusions

The comparison table shows us the impact of different salaries at the three different marginal corporation tax rates.  The optimal position is:

• £12,570 salary for company’s incurring 19% corporation tax
• £27,216 salary for company’s incurring 25% or 26.5% corporation tax & have £2,500 of employment allowance available.

At all corporation tax rates the decision not to process a director salary was the least optimal position.  Processing at £9,100 was a significant improvement but this level was never the optimal salary position.

For a company with no employment allowance then the cost saving between a £9,100 and £12,570 salary changes significantly with the various marginal corporation tax rates:

• At 19% Corporation tax the director is worse off by £247 / year
• At 25% Corporation tax the director is worse off by £464 / year
• At 26.5% Corporation tax the director is worse off by £518 / year

Therefore we would ordinarily recommend at least a £12,570 salary to most directors but especially so where the company incurs corporation tax at the main rate (e.g. business with over £50k of annual profits).

Nevertheless this does not provide bespoke advice to the business / director and so other considerations may need to be brought in such as:

• If this is profit making company?  Will corporation tax savings be realised and if so at what rate and when?
• The option of other extraction of profits such as via rent or interest payments or disposal/ sale of the business.
• Other sources of income belonging to the director
• The cost of payroll services

If you would like to take bespoke advice please contact your account manager or write to us at info@howladerandco.com

Where a company has profits over £50,000 and is suffering tax at the main rate of 25% the higher salary of £27,216 was more efficient with annual saving of £522  / £722 as compared with a £12,570 salary.  As the situation will typically be relevant to two director company’s the total saving could be doubled as this saving relates to each director.

Below we consider an alternative scenario to demonstrate what can happen in less usual circumstances where more than half of the employment allowance is available.

Alternative scenario: Company’s eligible for E.A.

This example is based on a company which incurs marginal corporation tax at a rate of 26.5%.  In then considers what happens if it becomes eligible for the employment allowance but that the majority of the allowance (£4,828.60 is available to utilise against the employers NICs incurred on a single director’s salary).

This could happen if an employee (not the director) is paid £2,000 for one month of the 2024/25 tax year (e.g. Apr-24 before leaving or Mar-25 upon joining).  In which case the employee would be paid £1,242 over the secondary threshold (£2,000 – £758), which would incur £171.40 secondary NICs (at 13.8%)

The employment allowance is claimed as a result of the employee but then the balance of £4,828.60 is available to utilise on the director.

To utilise the full allowance the director could receive a salary of £44,090 and this is considered in the table below.  It is compared with a £12,570 salary and £27,216 salary.  Again this is considering the distribution of £50,000 of pre-tax profits.

26.5% Corp. Tax:

Detailed workings for 26.5% corporation tax rate with £44,090 salary.

Company Profits:

Director’s Income:

Director’s personal tax

Director’s Tax Computation

Director’s Class 1 Primary (Employee) NICs: