Optimum salary levels for company owners from april 2021
Every tax year the National Insurance and tax thresholds change, and we think carefully about the most tax efficient salary levels to recommend to company Directors.
With a new tax year almost upon us, the government have announced the NIC thresholds that will apply from April 2020 onwards, as follows:
| Pay Frequency | LEL | PT | ST | UEL |
| Weekly | £120 | £184 | £170 | £967 |
| Monthly | £520 | £797 | £737 | £4,189 |
| Yearly | £6,240 | £9,568 | £8,840 | £50,270 |
For those not well versed in National Insurance acronyms, the above headings can be deciphered as follows:
| Acronym | Acronym Name | What it means! |
| LEL | Lower Earnings Limit | Above this level earnings count for state pension etc |
| PT | Primary Threshold | Above this level Employees NIC kicks in @ 12% |
| ST | Secondary Threshold | Above this level Employers NIC kinks in @ 13.8% |
| UEL | Upper Earnings Limit | Above this level Employees NIC reduces to 2% |
The above thresholds have all risen slightly over the current 2020/21 levels.
What about tax? The personal allowance increases slightly from £12,500 to £12,570 from April 2021, while the higher rate tax threshold increases from £50,000 to £50,270.
So, what is the optimum salary level for you? The answer depends on a couple of factors, but can be broadly summarised as follows:
| Salary level | Who for? | Why? |
| £9,568 | If Director is only employee OR if £4k employment allowance fully used against other staff | Above £8,840 19% Corporation Tax saving vs 13.8% Employers NIC cost yields overall saving but above £9,568 triggers 25.8% NIC |
| £12,570 | If other employees but balance of employment allowance left | Since no Employers NIC to pay, 12% Employees NIC cost is outweighed by 19% Corporation Tax saving |
| £8,840 | If other income >£3k pa (eg. buy to let property) | Salary above this would be taxed at 20% so incurring NIC as well would outweigh Corporation Tax saving |
We’ll be in touch further soon with our recommendations for each client, but in the meantime, for further advice on this matter, please contact your Client Manager, or one of our payroll team.
Key Facts
- Employees NIC threshold rises from £9,500 pa to £9,568 pa from 6 April 2021
- Employers NIC threshold rises from £8,788 pa to £8,840 pa from 6 April 2021
- The tax-free personal allowance increases to £12,570; the higher rate threshold to £50,270
- Our recommended optimum salary for one person company Directors will be £9,568 pa
- Where more than one Director/employee it will often be £12,570 pa, but not always
For further advice on this matter, please contact me.
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