Tax Efficient Director's Salary 2023/24
In general, the best way for a director to pay themselves is through a split of salary and dividend payments. The reason for this is that a basic salary incurs little to no national insurance contributions and is covered by your annual personal tax-free allowance, whilst being a tax-deductible business expense for your company for corporation tax purposes. Learn more about dividends here.
Assumptions for this article
When discussing the optimal basic salary for directors, this article assumes that you have no other income from other sources (e.g., employment, property, or investment). The reason for this is that if you do, your tax-free allowances may be being used elsewhere, which MAY mean paying yourself a basic salary is no longer tax efficient.
If you want a reminder of the basics of payroll and how it works, check out our UK payroll explained guide here.
What salary should I pay myself in 2023/24?
What we recommend depends on the number of staff you employ.
Sole Directors (One Employee)
As a sole director you have two options, you can pay yourself either £9,100 or £12,570.
Paying yourself £9,100, the secondary threshold, means that you don’t have any tax or national insurance obligations.
Paying yourself £12,570, the personal tax allowance, means that you will have an employer national insurance liability of roughly £480. Note, this will be offset by increased corporation tax savings. For example, as your salary expense will be increasing by £3,950 (£3,470+£480), the corporation tax will be reduced by £750 (£3,950 X 19%). This assumes that your company profits are £50,000 or under. If your annual profits are higher, then your CT savings will also increase.
Although there is a greater tax saving when paying yourself £12,570, some people opt to pay themselves £9,100 in order to avoid the headache of worrying about payroll liabilities. If you are a payroll client of ours we will stay on top any obligations for you, so we would typically recommend paying yourself the higher amount.
Employer's National Insurance
Employer National Insurance is another form of tax on earnings that is paid by an employer. Currently the tax is 13.8% of earnings above secondary threshold, £9,100.
Employment Allowance is an annual tax allowance that offsets the first £5,000 of an employer’s national insurance liability in a financial year. To qualify your total Employer’s Class 1 National Insurance liability was less than £100,000 in the prior tax year (22/23).
You cannot claim Employment Allowance if you’re a company with only one employee paid above the Class 1 National Insurance secondary threshold (£9,100) and that employee is a director. So, if you’re a sole director, the allowance cannot be applied to your payroll.
Two or More Directors
If you have two directors or one additional employee you will be eligible for employment allowance, so £12,570 will be the most efficient salary for you as your employer’s national insurance will be covered and you will have no tax or employee national insurance liability.
Will I still qualify for state pension and other benefits?
Yes, although you are not making National Insurance contributions, if you have a salary of more than the Lower Earnings Limit (LEL), which is £533/month, it will still count as if you are making contributions, so you will still receive the benefits associated with making them.