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The optimum directors salary 2021/22 will be £8,840 per annum, which equates to £736 per month or £170 per week. This is the most tax efficient amount for the majority of directors to pay themselves.
Owner managed businesses can typically decide how to pay themselves. This can be either a salary, dividends or a mixture of them both. Directors, which have no other income should look to pay themselves the optimum directors salary of £8,840. Any additional income should be paid as dividends.
What is the optimum directors salary for 2021/22?
The optimum directors salary 2021/22 is £8,840 per annum. The reason for this is all down to the National Insurance (NI) rates.
The lower earnings limit for NI in 2021/22 is £6,240 per annum. If you earn over this amount it will count as a qualifying year for your future state pension.
The secondary earnings limit for NI in 2021/22 is £8,840 per annum. If your annual salary exceeds this amount the employer (your business) will need to pay NI contributions.
Therefore paying up to the secondary threshold of £8,840 but not a penny more, means the taxpayer qualifies for the state pension but does not need to pay any contributions. Simply put, you can qualify for a state pension without making any NI contributions.
Why not pay £nil salary?
A company can pay a director (who is also a shareholder) through either salaries or dividends.
A salary paid is a tax deductible expense. The company can deduct tax at 19%, which is the current company tax rate.
A dividend paid is not a tax deductible expense for the company.
Therefore paying a salary of £8,840 to the director saves corporation tax of £1,679. There is no such saving if dividends are paid.
Also, by paying a salary of £8,840 you are ensuring another qualifying year for the state pension is added.
When is a £nil salary advisable?
The optimum directors salary 2021/22 should be £8,840 per annum only if the director has tax allowances available.
In situations, where the director has other income such as pension income, another salary, rental income, it may be advisable to pay a £nil salary. Also, if the individual is already at pension age and it is no longer important to have another qualifying year.
Under these circumstances, it is important to seek specialist tax advice, which we can offer. Getting the figures wrong may cost you thousands in extra taxes.
Why not pay higher salaries?
All taxpayers have personal allowances in which they can earn income tax free. As soon as these allowances are used up tax rates are applied.
When income exceeds £8,840 per annum, NI taxes are applied. Also, when the income exceeds £12,570 income taxes are applied.
The NI and income tax rates combined are significantly higher than the dividend tax rate. Even when accounting for the corporation tax reduction on the salaries, paying dividends is still more tax efficient.
When to pay more than the optimum directors salary?
In some certain circumstances it may be advisable to pay in excess of the optimum directors salary.
Should the director have a contract of service they must legally be paid the national minimum hourly wage. This would typically be higher than the £8,840 per annum.
Dividends can only be paid out if the company has profit and loss reserves. If the company has made losses in the past or is currently making losses, it may not be possible to pay dividends. Higher salaries may be the only option.
There are numerous assumptions made when arriving at the above figures. The amounts are not suitable for all directors. To calculate your optimum directors salary 2021/22 you must look into your individual circumstances – please get in touch if you’d like to discuss this further to ensure your tax position is optimised.
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