A new fiscal year means a new paradigm shift! Here’s how to work out the best directors salary 2022/23.
(3 minute read)
Today’s tax tip explains:
- What an optimal salary is
- How to calculate your optimal salary
- How to extract funds from your company efficiently
What is an Optimal Director Salary?
Director/shareholders have a lot of freedom when it comes to extracting money from their companies.
Generally, most will use a mix of a low salary, tax-efficient benefits and dividends. This type of strategy can lower your tax bill significantly.
The amount of National Insurance Contributions (NICs) you pay depends on your income, which, as a director/shareholder, you can control.
As a result, smart planning can optimise your income for as little in NICs as possible.
This National Insurance sweet spot is your optimal director salary.
Working out Your Optimal Director Salary:
Working out your optimal director salary can be difficult because there are so many moving parts to keep track of.
- Employment Allowance
- Corporation Tax
- Personal Allowance
- Lower Earnings Limit
Employment Allowance can sometimes be the deciding factor when calculating your optimal director salary.
If you can claim Employment allowance, your optimal salary could be as high as £12,570. This amount is also your Personal Allowance, the amount you can earn before encountering Income Tax.
Those who are eligible could benefit from taking a higher salary and claiming the allowance. This may increase your NI liability but with Employment Allowance, it’s often worth it.
The allowance isn’t available for companies where the only employee is a sole director who earns over £9,100.
In some cases, a £9,100 salary may be preferable. You will not be liable to pay NICs but will still receive a NI credit and reach the Lower Earnings Limit for pension purposes.
Optimal salaries vary significantly from business to business, so you should always seek advice from a trusted accountant who can assess your company fully.
Working out your optimal director salary is only one piece of the puzzle. Many director/shareholders extract money from their companies through a variety of means, you also need to consider dividends and other tax-efficient benefits.
This can be a difficult and time-consuming process.
Call us at 01772 788200 (or WhatsApp out-of-hours at 07787 010190) to speak to the Tax Expert team today! We provide honest, straightforward advice to make sure you get the most out of your businesses.
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