The monthly payroll for March 2023 will be the last for the tax year 2022-23.
As a director-shareholder, you should now be considering your salary levels for 2023-24, based on tax efficiency and State Retirement Pension reasons.
We would normally recommend a small increase in annual salary, for the new tax year ahead, at this time of the year. However, with the freezing of the personal allowance and National Insurance thresholds until 2028, for most director-shareholder clients, we would not recommend any increase in your company salary this year.
Personal tax allowances frozen to April 2028
The Chancellor, Jeremy Hunt, announced as part of the Autumn Statement 2022 that the Income Tax thresholds will be maintained at their current levels until April 2028.
This will see the personal tax allowance frozen at £12,570 through to April 2028. The existing thresholds for the basic rate, of 20%, and the higher rate of tax, of 40%, on income over £50,270, have also been frozen.
National Insurance thresholds frozen to April 2028
The amount of salary from each employment that you can earn before paying National Insurance will also remain frozen until April 2028.
The Primary Threshold, before employees start to pay National Insurance, will remain at £12,570, the same as the Income Tax personal allowance. Above this amount, and up to £50,270, employees pay 12% National Insurance and 2% on any salary above £50,270.
The Secondary Threshold, before employers start to pay National Insurance, will remain at £9,100. Above this amount, employers pay 13.8% National Insurance, with no cap or a lower rate on salary above £50,270.
Tax efficiency
The main factors to consider when setting director-shareholder salary is the Income Tax personal allowance of £12,570, National Insurance thresholds and marginal rates of tax (Income and Corporation Tax) and National Insurance. You also want to generate a qualifying year towards your State Retirement Pension by paying a salary at an appropriate level.
You want to fully utilise the £12,570 personal allowance each year. This is the amount of taxable income an individual can receive each year Income Tax free. Taxable income includes salary, rental income, bank and other interest and dividends received and also any self employment profits. You should generally aim to create tax deductible expenses in your company, like a salary, home office rent and/or loan account interest, that saves Corporation Tax but incurs no Income Tax.
Salary levels to consider for 2023-24
Any amounts that you withdraw from company profits, in excess of your company salary, is normally taken as dividends.
When reviewing how much salary to withdraw there are a few thresholds to consider.
The first is the Lower Earning Limit (LEL), of £533 pm or £6,396 pa. Up to this amount, no National Insurance is paid by employer or employee. However, you do not accrue one of your 35 qualifying years towards your state pension.
The second is the Secondary Threshold (ST) of £758 pm or £9,100 pa. This is the amount at which employers start paying National Insurance, at 13.8%, on all salary above this amount, without limit.
The third is the Primary Threshold (PT) of £1,048 pm or £12,570 pa. This is the amount at which employees start paying National Insurance, at 12%. You pay National Insurance at this rate, above £1,048 pm or £12,570 pa, on salary up to £4,189 pm, or £50,270 pa, and then 2% on any surplus.
Your company salary is generally the largest amount that helps to utilise of your personal allowance. It is sometimes the only amount that can be withdrawn from the company to best utilise the personal allowance.
Suggested salaries
Taking a salary up to the ST of £758 pm, or £9,100 pa, will result in no National Insurance being paid by either employer and employee. However, so long as your salary is above the LEL, of £533 pm or £6,396, you will accrue a qualifying year towards your State Pension and other social security benefits. This should therefore generally be your base company salary.
For some directors, with little other taxable income, it may be worth taking a salary in 2023-24 over the ST, of £9,100 pa, and up to the PT of £12,570 pa, i.e. £1,048 pm. Whilst the company will pay employer’s National Insurance, at 13.8%, the company will save Corporation Tax, at between 19% and 26.5%, on the salary, and with no Income Tax to pay.
When we say, ‘other taxable income’ in the above paragraph, we are talking about other employment income, rental income, bank and other interest and self employment profits etc. There is little point drawing a company salary over £758 pm, £9,100 pa, to unnecessarily pay National Insurance, if you can utilise the balance of your personal allowance through other taxable income. There is no National Insurance on taxable income like property rents and bank and other interest.
Generally, for an owner-managed limited company, we would not recommend paying a salary in excess of £12,570, as you’ll pay combined National Insurance of 25.8% (12% + 13.8%). If company profits, after salary, are less than £50,000 the company will pay 19% Corporation Tax. However, if company profits are between £50,000 and £250,000, the marginal rate of Corporation Tax is 26.5%
Further advice
This blog post is of generally application to smaller owner manage businesses. For further personal advice please discuss this with us. It is quite possible that your circumstances have changed in 2022-23, or will change in 2023-24.