Let’s focus on Directors owning their own companies.
A quick summary
- Primary NI threshold is changing on 6th July 2022
- Weekly – from £190 to £242
- Monthly – from 823 to £1048
- Annually – from £9880 to £12570 (which is also the income tax threshold)
That basically means an Annual amount of £11908 (3 months at £9880 and 9 months at £12570), £11908 is £992.33 per month (£12570 is £1047.50 per month).
So £992.33 will be below the Employee NI threshold.
However, the Employer NI threshold will be £9100 (£758.33 per month) and from that level Employers NI will be charged at 15.05% unless you have additional employees and are eligible for the Employment Allowance of £5000 (previously £4000).
Dividend Tax rates for 2022/23
- Allowance £2000
- Lower Rate 8.75%
- Higher Rate 33.75%
- Additional Rate 39.35%
National Insurance Rates for 2022/23
- Class 1 to the Upper Earnings Level 13.25%, then 3.25%
- Employer NI Rate 15.05%
- Employment Allowance £5000
Here some examples
- Salary £12570
- Dividends £2000 (dividend allowance)
- Interest from company £1000 (savings allowance)
- Total £15570
You will pay Class 1 Employee NI £87.72 (13.25% of (£12570 – £11908) [£662]) and your company will pay £522.24 (15.05% of (£12570 – £9100) [£3470])
Total NI Paid £609.96
The company will have saved 19% (at the lower rate) of (£12570 + £522.24 + £1000) x 19% = £2677.53 as these costs will be offset against profit
In order to get a dividend of £2000 the company will have been taxed £469.14 (19% of the gross amount)
- Salary £11908
- Interest £1000
- Dividends £37000
Employers NI will be £422.60
Dividend Tax will be £35000 – (£12570 – £11908) x 8.75% = £3004.58
In order to pay £37000 in dividends the company will need a profit of £45679 and will have paid 19% (assuming lower rate) which is £8679 corporation tax
In order to qualify for benefits including the state pension you have to earn above the Class 1 NI threshold
So it seems logical to opt for a Salary of £12570 (£1047.50 per month)
Above this level income tax starts at 20% and NI is 13.25% for the employee and 15.05% for the employer, overall thats 48.3% tax and NI (but the employer may be entitled to the employment allowance offsetting the employers NI and gross pay and employers NI are deductible against corporation tax)
If you have lent money to your company its worth paying some interest (at a commercial rate) as that is tax deductible for the company (saving 19% CT) and there is a savings allowance and in addition interest is not subject to NI, income tax starts at 20%
Dividends are better than salary because there is a £2000 allowance and then tax starts at 8.75%, but remember the company will have paid 19% CT on profits, so overall at lower rates of tax that 27.75% tax but dividends can only be paid if you make a profit or have profit reserves in the balance sheet.
If you are a client and want to try a specific combination perhaps adding other sources of income, let us know.