The new tax rates and allowances for 2022/23 for English taxpayers are as follows:
The tax-free personal allowance is £12,570
The basic rate threshold is £50,270
The tax-free dividend allowance is £2,000
2022/23 Employer and Employee National Insurance threshold:
It is important to be aware of the national insurance thresholds, employer’s national insurance threshold is lower than the employees which means if you pay yourself above the secondary threshold the company will incur employers national insurance.
If you pay above the primary threshold then you will incur both employers and employees national insurance resulting in you paying twice which isn’t very tax-efficient!
What’s the most tax-efficient way to pay a director’s salary and dividend for 2022/23?
For sole director/ only employee of the company
If you are the sole director of your own company then in most cases it is most efficient to extract income from the company by taking a low salary and the rest as dividends. The benefit of extracting funds this way will:
Take a salary at the 2022/23 rate of £758 per month or £9,100 annually and this will allow you to accrue all the benefits of national insurance without actually paying it and helps to build up your state pension qualifying years
The company can claim a 19% Corporation tax saving on the salary
You only need to extract dividends from the company based on what you need and therefore minimise your personal income tax liability
National insurance is not payable on dividends paid to you from the company
Directors are classed as ‘office holders’ which means you can pay yourself below the minimum wage without breaking any rules
Here is an example of a director wanting to extract £50,000 of income at the optimal minimal salary and dividends:
For a company that has 2 or more directors
Once you have 2 or more directors or 1 director and at least 1 employee the company is then eligible to claim National Insurance Employment Allowance.
This allowance means eligible employers can claim up to £4,000 per annum and therefore directors can pay themselves at the Primary threshold rate of £9880 per annum.
It is important to note the above assumes your contract is not caught by IR35, you are a UK tax resident, you are claiming the standard personal allowance, there is no issue with child benefit income tax charge and that you are only paying yourself a salary and dividends from your company.
Whether the company has 1 or 2 directors can be a balancing act between company tax saving and personal tax saving, it is always advisable to discuss the potential tax options before you extract funds from the company.
Please do not hesitate to contact Cube Accounting to discuss your options in greater detail.