We look ahead to 2023-24 tax year and optimal salaries for Directors.

The basics

Most small business owners who trade through a Ltd Co know that they will optimise their personal tax by paying themselves a small salary around the personal allowance and dividends on top.

The exact amount of salary that will optimise someone’s tax depends on numerous factors including:

• Tax Rates and Thresholds for the tax year

• The number of other directors or employees in the company

• Other sources of personal income (aside from the Ltd Co)

• Off-payroll working (IR35)

• Country of residence (England and Wales vs Scotland)

We will assume in what follows that there is no other personal income to consider, no IR35 working and the country of residence is England and Wales.

This being so, the basic idea is to use up as much of the personal allowance (£12,570 in 2023-24 tax year) with salary without incurring both Employers and Employees National Insurance. As National Insurance is tax deductible for Corporation Tax purposes and Corporation Tax rate is higher than NI rates, it is beneficial to incur Employers NI as long as Employees NI is not also incurred.

companies with one director and no employees

Companies which have no employees and only one Director cannot claim Employers Allowance which waives the first £5k of Employers NI.

In 2023-24 tax year Employers NI is incurred on salaries above £758/month. As no Employers NI can be waived with the Employment allowance, the optimal* salary for this category of Directors is therefore £758/month. This has not changed from the 2022-23 tax year as the threshold at which employers start to pay Employers NI has not changed.

Companies with multiple directors or other employees

Companies which have employees or more than one Director can claim Employers Allowance.

For these companies there will be two possible scenarios.

More than £5k of National Insurance is likely to be incurred

Depending on the number of employees and their salaries, more than £5k Employers NI may be incurred by other employees without adding in any Directors payroll.

In this scenario, adding Directors salary above £758/month will simply add to the National Insurance bill and the optimal* salary is £758/month as it is for sole Directors (see above).

Less than £5k of National Insurance is likely to be incurred

For companies with only two Directors or a small number of employees Employers NI incurred on salaries above £758/month may be waived by the Employers Allowance.

In this scenario the optimal* salary will be £1,047.50/month. Although Employees NI will be incurred it will be more than compensated for by the tax saving in Corporation Tax.

*See the assumptions in the section titled ‘The Basics’.

National Insurance Contribution Record

Business owners are also rightly concerned to keep their National Insurance qualifying payments running so as to be eligible for State Pension. As long salary is kept above £533/month this record of payments is maintained despite no actual contributions for NI being made.