Optimum salary levels for company owners from April 2022


March 7, 2022|In KRW Tax Tips|By Keith Witchell

Every tax year the National Insurance and tax thresholds change, and then last week Rishi Sunak announced an alignment of the NIC and tax thresholds from July 2022.

With a new tax year almost upon us, the government announced the NIC thresholds that will apply from April 2022 onwards, as follows:

Pay FrequencyLELPTSTUEL
Weekly£123£190£175£967
Monthly£533£823£758£4,189
Yearly£6,396£9,880£9,100£50,270
Then, from July 2022:
Pay FrequencyLELPTSTUEL
Weekly£123£242£175£967
Monthly£533£1,048£758£4,189
Yearly£6,396£12,570£9,100£50,270

For those not well versed in National Insurance acronyms, the above headings can be deciphered as follows:


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 @ 13.25%

ST                   Secondary Threshold               Above this level Employers NIC kinks in @ 15.05%

UEL                 Upper Earnings Limit                Above this level Employees NIC reduces to 3.25%

The above NIC rates have all risen by 1.25% from April 2022, as previously announced.

What about tax?  The personal allowance remains at £12,570 from April 2022, while the higher rate tax threshold also stays static at £50,270.

So, what is the optimum salary level for you?  The answer depends on a couple of factors, but also this year with the NIC primary threshold increasing from July, a pro-rated salary level is needed to ensure a consistent monthly salary for the 2022/23 tax year for many Directors.

Our advice can be broadly summarised as follows:

Salary levelWho for?Why?
£11,898If Director is only employee OR if £5k employment allowance fully used against other staffAbove £9,100 19% Corporation Tax saving vs 15.05% Employers NIC cost yields overall saving but above £11,898 triggers 28.3% NIC
£12,570If other employees but balance of employment allowance leftAs no Employers NIC to pay, 13.25% Employees NIC cost for 3 months outweighed by 19% CT saving

 

A good way to look at optimum salaries is to consider the tax cost of the alternatives.  So looking at the above two salary levels, the first gives an Employers NIC cost of £421 for the year, which applies in January, February and March 2023 and means some NIC for the company to pay over to HMRC, but it saves Corporation Tax at 19% on the salary over £9,100, which equates to £531.62.  Therefore, an overall saving of £110.62, compared to taking a lower salary and more dividends, which would be taxed at 8.75% (minimum).  So the true saving is actually higher, when compared to the alternative.

Likewise, with the second option there will be £89 of 13.25% Employees NIC triggered in March 2023, but this is outweighed by the 19% Corporation Tax saving on the extra salary, plus the dividend tax saved by taking extra salary rather than extra dividends.

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 to £9,880 pa from April 2022, then to £12,570 from July 2022
  • Employers NIC threshold rises from £8,840 pa to £9,100 pa from April 2022
  • The tax-free personal allowance remains @ £12,570; the higher rate threshold stays @ £50,270
  • Our recommended optimum salary for one person company Directors will be £11,898 pa
  • If more than one Director/employee & Employment Allowance not used up we advise £12,570 pa

For further advice on this matter, please contact me.

Keith Witchell

Director