The tax efficient salary for a director shareholder in 2022/23

Last year in 2021/22 it was a salary of up to £758 or £797 per month

In the tax year 2021/22, which ended on 5 April 2022, our pragmatic conclusion was if your company was already paying PAYE and NIC for other employees, it made sense for director shareholders to consider a monthly salary of £797 and incur a small ER Nic charge each month. But if all the employees were directors and happy with the smaller salary and the company had no other employees to pay PAYE and NIC for, then paying just £737 per month and avoiding all national insurance made sense for many.

New for 2022/23 – All change at the last minute in the March 2022 Spring Statement

In the March 2022 Spring Statement, the Chancellor announced an increase to the NIC threshold for employees to increase by £3,000 to match the income tax personal allowance of £12,570 from 6 April 2022. This was great news, but the the implementation was deferred until 6 July 2022 because the maths of the change was way more complex than it may have at first appeared and time was needed to allow payroll software to catch up.

In 2022/23, factoring in the personal allowance, dividend allowance and increased NI thresholds, the optimum position for a director shareholder, whether or not the company qualifies for the employment allowance could be to take an annual salary equal to the primary NIC threshold of £11,908 per annum.

The position must be kept under review and the proposed increase in corporation tax from April 2023 may change the position from 6 April 2023.

£2,000 of tax free dividends

Once again in the 2022/23 tax year the first £2,000 of dividends are tax free, after which dividend tax at 8.75% applies on dividends that fall within the £50,270 basic rate band, 33.75% in the upper rate and 39.35% in the additional rate band (above £150,000).

Why you might want a higher salary and lower dividends

  • If the business has been loss making through lockdown, it might be wise to avoid dividends that could be clawed back if the business fails
  • A £11,908 salary might not work for mortgage, or death in service life and permanent health insurance purposes
  • If you are involved in R&D activities and qualify for R&D tax credits, taking remuneration as salary can have huge R&D tax benefits
  • Shareholder agreements or other commercial agreements might restrict your options for paying dividends
  • Pension contributions are restricted to earned salary income – although company contributions to director shareholders can in certain circumstances exceed this

Maximise your £50,270 basic rate tax band

So, for some director shareholders the optimum may be a salary of £11,908 per annum in 2022/23 and £38,362 of dividends all falling within their basic rate tax band. The effective rate of tax for this mix of salary and dividend is just over 6%!

Martin Gibbs is Dafferns Managing Partner and specialises in advising small and owner managed businesses – to contact Martin, please click here