How the Optimal Directorโ€™s Salary Has Changed in the 2023/24 Tax Year

Posted on by jennifermrichardson

Each year the team at Jennifer M Richardson Ltd review how companies can make directorโ€™s pay packages as tax efficient as possible, balancing the split between dividends and PAYE salaries to consider varied tax treatments, allowances and National Insurance.

With so many changes introduced in the 2023/24 tax year, it may be more important than ever for directors to revise their remuneration and ensure they aren’t paying more taxes and exposing the business to higher obligations than necessary.

Reductions in Dividend Allowances, frozen Income Tax bands and reforms to Corporation Tax have added to the complexity โ€“ we’ll explain the best solution and how much a salary adjustment could save you and your company.

 

Setting a Tax-Efficient Directorโ€™s Salary in 2023/24

There are some scenarios outside of the norm, such as when a director is past retirement age or has other substantial income. Still, most directors will benefit from a salary during the 2023/24 tax year as follows:

  • ยฃ12,570 per annum (gross) or,

  • ยฃ1,047 per month or ยฃ241 per week

Remaining pay should ideally be paid as dividends, based on National Insurance Contributions (NICs) both for the employer and employee.

Why pay a salary at all rather than directing all pay for company directors through dividends? There are two reasons, not least that the increasedย Corporation Taxย rates from April 2023 mean that the tax savings associated with payroll are higher, where salaries are tax-deductible expenses.

The other contributing factor is that by paying a salary, even at a low level, the director retains their State Pension entitlement, which requires individuals to earn a wage above the Lower Earnings Limit (LEL), set at ยฃ6,396.

Director’s salaries are at the company’s discretion, unlike salaries for other workers, so there is no need to adhere to minimum wage legislation since the payments are made for a position of office.

 

National Insurance and Directorโ€™s Salary Calculations

There are two meaningfulย NIC thresholds: the Primary and Secondary National Insurance Thresholds. If a director earns above the Primary Threshold (PT), set at ยฃ12,570, they begin paying employee NICs.

If the salary hits the Secondary Threshold (ST), the business is liable to make employer’s NICs. For this tax year, the threshold is ยฃ9,100, amounts above which incur a NIC liability of 12%.

Many companies have experienced confusion because the PT and Personal Allowance (the annual tax-free income any person can earn) are now aligned, but both figures are currently fixed at ยฃ12,570.

Keeping the directorโ€™s salary at ยฃ12,570 means that the director does not incur Income Tax since they are not earning above the Personal Allowance yet exceeds the LEL to retain State Pension eligibility without triggering the PT.

 

Recapping Thresholds and Allowances Against Director’s Salaries

  • Personal Allowance = ยฃ12,570 โ€“ the maximum you can earn before incurring income tax.

  • Lower Earnings Limit = ยฃ6,396 โ€“ the salary you must make to qualify for the UK State Pension.

  • Primary NI Threshold = ยฃ12,570, the amount above which you pay employees’ NICs.

  • Secondary NI Threshold = ยฃ9,100 โ€“ the amount above which the employer pays NICs.

Note that if the business is eligible for theย Employment Allowance (EA), it can offset the employer’s NIC payable on a salary above ยฃ9,100.

While the Dividend Allowance fell from ยฃ2,000 to ยฃ1,000 in April 2023 and will drop again to ยฃ500 in the 2024/25 tax year, ยฃ12,570 remains the most efficient and optimal director’s salary because dividends are taxed differently from income tax.

Basic rate taxpayers pay 8.75% on dividends, increasing to 33.75% for higher-rate taxpayers and 39.35% for additional rate taxpayers โ€“ this remains lower than the comparable income tax rates, respectively 20%, 40% and 45%.

By optimising directors’ salaries, the business can reduce its Corporation Tax obligations, make use of Employment Allowance claims where applicable, limit employer’s NICs, and ensure directors do not pay unnecessarily high Income Tax.