In this guide, we explain how to work out the most tax-efficient salary level for limited company directors for 2023/24. Do you even have to pay directors a salary at all?
Should you pay yourself a salary as a director?
Do you have to pay directors a salary? No, you don’t. However, there are compelling reasons to do so.
Firstly, it is tax efficient.
As a limited company director, paying yourself and any other directors an annual salary is one of the fundamental ways of extracting profit from the company.
Salaries are an allowable business expense, and so are deductible against the company’s Corporation Tax (CT) bill. As a result, they represent the single biggest expense for most small companies.
So, if a sole director company pays a salary of £9,100, for example, this will result in a minimum CT saving of £1,729.
Secondly, in order for any year to qualify for your state pension, you will have to earn a salary at least equal to the prevailing Lower Earnings Limit (LEL). This is £6,396 in 2023/24.
Thirdly, although less usual, there may also be a legal obligation for the director to be paid a salary – either via a written contract, a shareholders agreement, or as specified in the company’s Articles of Association.
What factors determine the optimal director’s salary?
Corporation Tax rates have gone up for the 2023/4 tax year if your company generates profits of £50,000 or more, so the CT savings listed below could potentially be higher if your profits are over £50,000.
The most tax-efficient salary is determined by various factors:
Income Tax personal allowance
The personal allowance – below which no income tax is payable – remains at £12,570. This applies to most taxpayers, although there may be reasons why your entitlement may be lower.
Primary Threshold for NI (for employees)
This is the threshold above which Employees’ NICs are payable. This is £12,570 in 2023/4.
Secondary Threshold for NI (for employers)
This is the threshold above which Employers’ NICs are payable. For 23/24 this is £9,100.
Lower Earnings Limit (to qualify for the state pension)
As we discussed earlier, you will earn credits towards the state pension as long as your annual salary is above the LEL, which for 23/24 is £6,396.
Eligibility to claim the Employment Allowance
If your limited company qualifies for the EA, then it will be able to offset any Employers’ NI liabilities – up to an annual maximum liability of £5,000 per year.
Unfortunately, one-man companies cannot claim the EA, although if you have 2 or more employees, you could benefit from this incentive. Find out more here.
What is the most tax-efficient salary strategy for 2023/24?
Taking into account the current tax thresholds listed above, the optimum salary for a director is ultimately determined by the eligibility of the company to claim the EA; if it is eligible, the employers’ NI costs are cancelled out.
Option 1 – £9,100 (company can’t claim the EA)
This is a popular option for companies that aren’t eligible to claim the EA. At this level, there are no income tax or NI liabilities at all, which also results in minimal PAYE administration.
Option 2 – £12,570 (company can’t claim the EA)
If you own a one-man limited company, or cannot claim the EA for any other reason, the most tax-efficient salary for 23/24 is £12,570. No income tax or employee’s NICs are payable, but there is an employer’s NIC liability of £478.86.
As a result of CT savings, the company will be around £270 better off compared to taking a £9,100 salary, but there’s a little bit more administration involved.
Option 3 – £12,570 (company can claim the EA)
If your company can claim the EA, the most tax-efficient salary for 23/24 is £12,570. No income tax is payable, and the employer’s NIC bill is refunded by the EA. The employee does not have to pay any employee’s NIC.
As a result of CT savings, your company is around £660 better off – per employee- who is paid £12,570 compared to £9,100.
Try our Salary & Dividends calculator to find out exactly how much tax you’ll pay this tax year.