What Is The Optimum Directors Salary For This Tax Year?

Every business owner knows they can decide for themselves how they're going to withdraw money from their company. This could be a salary, dividends or a mixture of both, but what is the optimum directors salary?

In previous tax years, it was always recommended that directors pay themselves a salary up to the second threshold. The threshold for 2022/23 is £9,100 per annum which will avoid any PAYE or Employees/Employers National Insurance.

"However, is this an optimum directors salary?"

I don't believe it is anymore. The most optimal salary for 2022/23 is now £11,908 instead. If you are a company director with no other source of income, then the salary of £11,908 is optimum. Any other income you wish to be paid by your company should come in the form of dividends.

You may think that this breaches the second threshold, but although you'd be liable to pay Employers NI, you would save in Corporation Tax. So, although Employers NI would be £422, you'll save £613 in Corporation Tax over the year.

Ok, but the personal allowance is £12,570, so why pay yourself £11,908 instead? Well, the employee's NI threshold was increased in the recent Spring Statement, but it doesn't take effect until the 6th of July 2022. Paying yourself £992 a month (which is £11,908 over 12 months) only incurs Employee NI in months one to three.

Of course, dividend rates are lower than PAYE and NI so when your income exceeds £11,908 it's worth exploring dividends. They have their own untaxable allowance of £2,000 in 2022/23 so a director has £14,570 available overall which will be tax-free.

The next £35,700 of dividends are taxed at 8.85% which is an increase from 7.5% in the last tax year. A director paying themselves £50,270 as an optimal salary and dividends combination will pay a tax rate of just over 6%.

"Salaries are a tax-deductible expense whereas dividends are not!"

Paying yourself the optimum directors salary saves Corporation Tax and gives you another qualifying year for the State Pension. A nil-salary approach is only advisable if the director has no untaxed allowance remaining due to other income.

If you'd like to find out more about anything I've written here, do call me on 01908 774323 or leave a comment below and let's see how I can help you.