Optimum salary levels for company owners from April 2022

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:

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:

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.