What is the optimum pay for 2022/23 – examples

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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

Example 1

  • 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)

Example 2

  • 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.


What is the optimum tax efficient salary 2015-16?

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Many small business owners ask this question, typically they are a sole director and share holder and want to decide from a tax and NI perspective what the optimum salary is (the rest of their income coming from dividends).

The new lower earning threshold for National Insurance is £5,824 per year (£112 per week) for 2015-16, there is an advantage to paying above this level so that you will earn credits towards a state pension. Its expected in current terms that a years credit is worth £225 pension per year for life. Employees start paying NI when earnings are above £155 per week)

The Employment Allowance of £2,000 has been continued into 2015-16 which means you won’t have to pay any employer National Insurance contributions at all if you usually pay less than £2,000 a year.

The personal tax free allowance for 2015-16 is £10,600.

So assuming you aren’t a higher rate tax payer and you haven’t used up the employment allowance on other staff, £10,600 would be the optimum salary because:

Saved Corporation Tax at 20% = £2,120

Employee NI 12% on (£10,600 – £155 x52) = (£304.80)

Saving £1,815.20

Beyond this point income tax is payable at 20%


What if you change a dividend to salary

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Let’s look at the case of Richard and Julie Jones v HMRC [2014] UKFTT 1082 (5 December 2014).

They took a small salary and regular dividends from their recruitment company which was absolutely fine until the company got into financial trouble!

Their accountant (unethically but in an attempt to help their client) suggested they should re-write history and change the dividends to salary so that the liquidator couldn’t recall the dividends.

HMRC then decided to demand PAYE and NI and pursued Richard and Julie personally.

HMRC was refused the right to collect PAYE tax and NI due on the salary, not because the law didn’t allow it, but because it wasn’t possible for Richard & Julie to reclassify the dividends. They had been properly paid and the correct procedure followed. History couldn’t be rewritten and the dividends should have been changed to loans if the dividends were illegal.


What are Directors Emoluments?

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The reporting requirements are set out in The Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008, obviously emoluments include:

  1. Salary
  2. Bonuses
  3. Compensation for Loss of Office
  4. Benefits
  5. Share Options
  6. Long Term incentives
  7. Pensions

But it can also include payments made via other companies for ‘Qualifying Services’, these are payments paid in relation to the Directors services as a Director of the reporting company (Section 8, Part4, Paragraph 17).

In many cases this could be obvious for example if the Director used a Personal Service Company (PSC) or if the director invoices the company for management services or for management charges. But often invoices relate to the supply of products and services which don’t fall within qualifying services.

Its worth noting that unquoted companies with less than £200k for Directors Emoluments are not required to report details of the highest paid director.

Its also worth remembering that any related party transactions should be fully disclosed in the related party note, so is further clarification of what should be emoluments needed?