The reason for this is all down to the National Insurance (NI) rates
As a director of a limited company, you decide how much to pay yourself in order to maximise tax reliefs and minimise your tax bill
The primary earnings limit for NI in 2024/25 is £12,570 per annum. If your annual salary exceeds this amount, then you the employee will need to pay NI contributions.
The secondary earnings limit for NI in 2024/25 is £9,100 per annum. If your annual salary exceeds this amount the employer (your business) will need to pay NI contributions
The optimum in 2024/25 is to pay £12,570 but not a penny more. This ensures the taxpayer qualifies for the state pension but does not need to pay any employee contributions. Yes, you have read this correctly! You can qualify for a state pension without making any personal NI contributions
The personal allowance and the primary NI threshold are now aligned. They are both now £12,570
The employees NI threshold was increased to £12,570 in July 2022
Why not pay a £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 corporation tax rates from April 2023 is now 19%, 25% and 26.5%. A dividend paid is not a tax deductible expense for the company.
Therefore paying a salary of £12,570 to the director saves corporation tax of anywhere between £2,388 and £3,331. There is no such saving if dividends are paid. Also, by paying a salary of £12,570 you are ensuring another qualifying year for the state pension is added.
When is a £nil salary advisable?
The optimum directors salary 2024/25 should be £12,570 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 £12,570 per annum, both national insurance taxes and income taxes are applied.The NI and income tax rates combined are 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 £12,570 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 it may not be possible to pay dividends. Higher salaries may be the only option.
Why not pay a directors salary of £9,100?
In previous years it has always been recommended to pay optimum salaries up to the secondary threshold. In 2024/25 this threshold is £9,100.Paying up to the secondary rate avoids PAYE, employees NI and employers NI.Our recommended optimum salary of £12,570 will be liable to employers NI but it saves more in corporation tax. The extra employers NI totals £478 (calculation is £3,470 at 13.8%) but the corporation tax saved is at least £750. (calculation is £3,470 at 19% + £478 at 19%). The corporation tax saved increases to £1,046 at the higher tax rate of 26.5%. (calculation is £3,470 at 26.5% + £478 at 26.5%).
When to pay a directors salary of £9,100?
Paying the optimum directors salary of £12,570 does incur employers NI of £478. This will need to be paid to HMRC. Many businesses would rather avoid this extra burden of making additional tax payments. To avoid making the payments, the salary needs to be reduced so that no employers NI is due. To achieve this, the optimum directors salary should be reduced to £9,100. Reducing the salary results in higher taxable profits.
Can I claim the employment allowance?
The employment allowance allows a company to reduce their employers NI liability by up to £5,000 per annum.Unfortunately the employment allowance is not available to all businesses. A company must have multiple directors or employees to be able to make the claim. Should an employment allowance claim be available, then the employers NI of £478 would reduce down to £nil. This increases the tax savings of paying an optimum directors salary of £12,570. When compared to a salary of £9,100, the tax saved is between £659 and £919. (calculation is £3,470 at 19% or 26.5%).
What is the optimum directors salary for a sole director in 2024/25?
Sole directors without any other employees don’t benefit from the employment allowance. This results in employers NI of £478 being payable. The logical answer would therefore be to pay the lower salary of £9,100. This is below the secondary threshold so no employers NI is payable. We don’t recommend this. The higher optimum directors salary of £12,570 saves corporation tax of at least £750, which increases to £1,046. (Depending on the corporation tax rate applied). Sole-directors should still pay themselves £1,047.50 per month.