The Most Tax Efficient Director’s Salary in 2021/2022

May 25, 2021 | Guide, Tax

While executing your many responsibilities as a director, it is also really important that you work out the best way to pay yourself and your fellow directors. Unlike a sole trader, a director of a limited company cannot simply keep their profits. On the other hand, paying a full salary to the directors hinders the tax efficiency of your business. Furthermore, it could start draining your cash reserves. The simple answer to this profit extraction problem would be a blend of a director’s salary and dividend payments.

But we understand that it is not as straightforward as you’d like it to be. The factors to be carefully considered include paying dividends, taking a loan from the company, pay-outs, and paying into a pension and other benefits. So, we thought we’d make it easier for you.

Here’s our guide to the simplest, and most beneficial, ways of paying yourself as a director.

 

The new rates and allowances for 2021/22

  • The tax-free personal allowance increases to £12,570
  • The basic rate threshold increases to £50,270
  • The tax-free dividend allowance remains at £2,000  

 

Income tax rates & threshold for 2021/2022

As your earnings increases the portion you need to pay the government as tax also increase.

Tax Band Name Threshold for 2021/22
Tax Free Personal Allowance £ 12,570
Basic Rate Income Tax – 20% £ 12,571 – £ 50,270
Higher Rate Income Tax – 40% £ 50,271 – £ 150,000
Additional Rate Income Tax – 45% £ 150,000 Upwards

 

National Insurance and director’s salaries

National Insurance Contributions (NICs) are payable by employers as well as employees. Being a director means you’re technically an employee of your limited company, so if your salary is above the threshold (the point at which you start paying NI) for employer and employee NI:

  • The business has to pay employer’s National Insurance Contributions.
  • The director has to pay employee’s NI.

 

Monthly Threshold 2021/22 Annual Threshold 2021/22
Lower Earning Limit – Employees earning below this limit will not incur NI. If it is above this limit, they will preserve their future entitlement to start pension and benefits. £ 520 £ 6,240
Primary Threshold – This is the point which employees start to pay NI, even an employee earns below this limit but above the lower earnings limit they do not need to pay NI £ 797 £ 9,568

 

Secondary Threshold – Employers need to pay National Insurance Contribution at the rate of 13.8% if the salary is above this limit. £ 736

 

£ 8,840

 

 

 

State Pension

 

Accumulating qualifying years for your State Pension as a director is aided by taking a salary which is higher than the Lower Earnings Limit (LEL) (£6,240 per year, in 2021/22)

Important: Your salary being higher than the LEL but lower than the Primary Threshold will allow you to be eligible to all the benefits of NI, without having to pay it. This also has a direct impact on how much State Pension you will be entitled to in the future.

 

Dividend Rates

Dividend payments are not liable for National Insurance.

Dividends are not tax deductible.

The Dividend Allowance for 2021/22 is £ 2,000.

Dividend Tax Rate 2021/22
Basic Rate Taxpayers Pay on Dividends 7.5%
Higher Rate Taxpayers Pay on Dividends 32.5%
Additional Rate Taxpayers pay on Dividends 38.1%

 

The Most Efficient Salary for Sole Director on the Payroll in 2021/22

The most tax efficient director salary for 2021/22 is the Secondary Threshold Limit for NI, which is £ 8,840 per annum or £ 736.66 per month.

The Most Efficient Salary for Two or More Directors on the Payroll in 2021/22

Having 2 or more directors on the company payroll means that you are eligible to claim the Employment Allowance.

  • The most efficient salary for 2 or more directors in 2021/22 is £ 9,568 per annum or £ 797.33 per month.

Employment Allowance

Employment Allowance allows eligible employers to reduce their annual National Insurance liability by up to £4,000.

To be eligible, employers need to have at least 1 employee or 2 directors on the payroll.

Once you have used up your full £4,000 allowance in a tax year, you’ll need to start paying any remaining employer contributions towards National Insurance.

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