Tax Efficient Director Salaries in 2021/22

For most owner managed businesses, company directors who are also shareholders will pay themselves a mix of salary and dividends.

There are a number of factors to consider when calculating the most tax efficient mix for your circumstances, including what other income you receive, if your business is making a profit or loss and if you have any other employees.

Do I need to pay myself a salary?

If your limited company is your sole source of income it is recommended that you pay yourself a salary above the Lower Earnings Limit (LEL) for NICs in order to qualify for certain state benefits (such as state pension). The LEL for 2021/22 is £6,240 per annum.

The threshold at which you begin to pay national insurance on your salary is £8,840 and £12,570 for PAYE. That means you are able to pay a small salary to qualify for those state benefits without actually making any NI or PAYE contributions.

The salary from your company will also be an allowable expense for corporation tax purposes, so it is usually beneficial to pay a small salary to help reduce the amount of corporation tax you have to pay. Dividends, are not a tax deductible expense.

So what is the most tax efficient salary for a director in 2021/22?

The most tax efficient salary for a director who is the sole employee is usually £8,840 per annum.

However, if you have other employees on the payroll it may be more efficient to pay a salary up to the personal allowance threshold of £12,570, as the employer national insurance contributions could be covered by the employment allowance.

How Lenio Accounting can help?

There is a lot to consider when deciding on the level of salary and dividend mix. We work closely with our clients to help them choose the best mix for their circumstances each year.

To find out more about how we could work together get in touch.