Optimal director shareholder’s salary 2022/23

Director shareholders

Director shareholders can typically decide how to pay themselves. This can be either a salary, dividends or a mixture of both. The directors are likely to look to you for advice on the most tax-efficient salary to take for 2022/23 with the first payment date on 30 April 2022, so how should you advise them?

NI rates for 2022/23

To work out the most tax-efficient salary, we need to look at the NI thresholds for 2022/23 which were revised in the Spring Statement 2022.

Lower earnings limit (LEL). The LEL for NI in 2022/23 is £6,396 per year. If an individual earns over the amount, it will count as a qualifying year for their future state pension. Therefore, a director should always pay themselves at least £6,396 to ensure they can get the maximum state pension.

Primary threshold (PT). In the Spring Statement 2022, the Chancellor stated that the PT was increased to match the personal allowance of £12,570 per year. However, this increase will only start from 6 July 2022 (month 4) and the earlier months remain at the original amount of £9,880 per year so the NI threshold is only £11,908 for 2022/23 for directors who are paying NI on an annual earnings basis. For directors not on an annual earnings basis, the PT is £823 for months 1 to 3 and £1,048 for months 4 to 12. Above this threshold and the director will need to pay 13.25% employee NI.

Tip. Particularly given that the PT threshold is increasing after month 3, you should ensure that the annual earnings basis for NI is ticked in your payroll software for all shareholder directors on the minimum salary plus dividends package. This is also known as the alternative method and will avoid any NI being charged in months 1 to 3.

Secondary threshold (ST). The ST for 2022/23 is £9,100 per year. So, your company will pay Class 1 secondary NI of 15.05% on the director’s salary over £758 per month.

Optimal salary for 2022/23

Based on these NI rates, the optimal salary for directors who have no other employment is £11,908. This ensures that the director qualifies for the state pension but does not need to pay any Class 1 employee contributions.

Why not pay a salary of £9,100? The ST is £9,100 so paying a salary up to £11,908 means that the company will pay 15.05% Class 1 secondary (employers’) NI on £2,808 = £422.60. However, assuming your company is making profits, it will save corporation tax of £613.81 ((£2,808 + 422.60) x 19%) so it is more tax-effective to pay the 15.05% NI.

Optimal dividends

Assuming the director shareholder has no other income and wants to take the salary of £11,908 plus dividends up to their basic rate tax band, the optimal dividends for 2022/23 are £38,362 per year or £3,196.83 per month.

Tip. If the director shareholder’s dividends are shown on their payslip then you need to make sure that the payroll software classifies them as no PAYE and no NI.