For the 2023/24 fiscal year, in most cases, the optimum director’s salary for a typical owner managed business will be £12,570 per annum with any further earnings drawn by way of dividends (subject to available distributable profit and loss reserves). This amounts to a salary of £1,047 per month or £241 per week. This is typically the most tax efficient amount for most directors to pay themselves however there are a number of other important considerations including for example:
- Availability of employment allowance
- Age of the director – there may be instances where it is more tax efficient for directors over state retirement age to pay higher salaries subject to the availability of the employment allowance.
- Directors being involved in R&D activities where, for corporation tax purposes, an enhancement to their salary may be available
Why is the optimum director’s salary typically £12,570?
The reason for the optimum director’s salary 2023/24 being £12,570 is down to the National Insurance (NI) rates.
The lower earnings limit for NI in 2023/24 is £6,396 per annum. If you earn over this amount it will count as a qualifying year for your future state pension.
The primary earnings limit for NI in 2023/24 is £12,570 per annum. If your annual salary exceeds this amount, then unless you have reached state retirement age, will need to pay employee NI contributions.
The secondary earnings limit for NI in 2023/24 is £9,100 per annum. If your annual salary exceeds this amount, the employer (your business) will need to pay NI contributions.
In most cases, the optimum salary for owner managers in 2023/24 is to pay £12,570 but not a penny more. This ensures the taxpayer qualifies for the state pension but does not need to pay any employee contributions.
The personal allowance and the primary NI threshold are now both £12,570.
There will be instances where £9,100 is more beneficial (particularly for single employee companies or those not eligible for employment allowance for other reasons) and others where a higher salary should be set. We recommend speaking to your normal payroll contact if you have any questions.
For more information and advice on this topic, please contact our Director of Client Services, Andrew Kilby at the Oxford office.