Hopefully we can provide some clarity on this.
As a director, you’re actually an employee of your own limited company which can be confusing as you are also the employer.
Employers and employees both pay National Insurance Contributions (NICs) on salary payments, but not on dividends, so it makes sense to pay yourself a mixture of salary and dividends where appropriate.
When working out how much to pay yourself, you need to consider National Insurance contributions as an employee and employer, how many people there are in the business, tax allowances for dividends and for income and the corporation tax relief for employee salaries.
The personal allowance for 2022/2023 tax year is £12,570 meaning you can pay yourself this level of salary without any tax being due.
However, you also need to remember the National insurance:
The 2022/23 NI thresholds for employers and employees is shown below
From 6th April 2022 – 5th July 2022 employees can earn £823 per month before paying national insurance.
From 6th July 2022 – 5th April 2023 employees can earn £1,048 per month before paying national insurance.
For the 2022/2023 tax year employers pay national insurance for their employees once they earn over £758 per month.
Taking into account the above thresholds the optimum salary for a sole director in 2022/23 is £9,100. (£758.33 per month)
The most efficient salary for 2 or more directors or one director and at least one other employee in 2022/23 is £11,908. (£823 per month for April 2022 – June 2022 then £1048 per month for July 2022 – April 2023)
In 2022/23 eligible employers can use the Employment Allowance to claim up to £5,000 in order to cover the costs of employer’s National Insurance, this was £4,000 in previous years.
To be eligible, employers must have at least 1 employee, or 2 directors, on the payroll, and the directors must not have another company that is claiming the Employment Allowance already. This means that sole directors can’t claim the allowance, which is why the optimum salary is a bit different for them.
In 2022/23, the Dividend Allowance is £2,000 so we also recommended paying this if shareholding and profits allow.
Other important points:
Salaries are an allowable expense for Corporation Tax relief, so if you’re a company director then paying yourself a salary from the business can help you lower your corporation tax bill.