What's the best salary/dividend mix for a limited company for 2022/23?
This article covers the most tax efficient structure of salary and dividends for the 2022/23 tax year (6th April 2022 to 5th April 2023) – if you would like to read our equivalent article for the 2021/22 tax year click here.
As always, we would advise that you discuss your specific circumstances with a professional before taking any action.
Here are some key assumptions we have made in this article:
- You are a UK resident tax payer with a standard personal allowance
- Your only source of income is your salary and dividends from your limited company
- You are not affected by IR35
There are other issues we have not covered in this article, including student loan repayments, child benefit high income tax charge and the withdrawal of the personal allowance once your income exceeds £100,000
How are salary and dividends taxed in 2022/23?
For 2022/23 the personal allowance remains £12,570 – this means your first £12,570 of income is tax free.
Also the higher tax band has remained at £50,270
For income above this the tax rates are as below (these do not apply to dividends which we discuss after this):
- £12,570 to £50,270 20%
- £50,270 to £150,000 40%
- £150,001 + 45%
The dividend allowance remains at £2,000 (same as 2021/22) – this means the first £2,000 of your dividends are tax free.
Over and above this £2,000, the dividend income is taxed as follows:
- If you have any un-used personal allowance (£12,570), that element is tax free
- Any dividends in the basic tax band (up to £50,270) attract a tax charge of 7.5%
- Dividends above the basic tax band (over £50,270) are charged at 32.5%
- Any dividends in the upper tax band (£150,000+) are taxed at 38.1%.
For example, if your only income was dividend income, you could receive £14,570 of tax free dividend income in 22/23, although the limited company paying out the dividends must pay corporation tax on any profits, and dividends don't count as expenses for tax purposes.
What's the most tax efficient dividend and salary structure for 22/23?
For limited company business owners, taking a low salary with the balance of income being extracted as dividends is a common tax planning strategy.
- Withdraw a low tax efficient salary, no higher than the personal allowance so that it does not attract personal tax
- Ensure the salary is high enough for national insurance purposes i.e. that it counts as a years ‘stamp’ for your national insurance history to help protect your future entitlement to state pension and other benefits
- The salary is a tax allowable cost for your business therefore corporation tax is saved at 19% (corporation tax rate for 2021/22) on the gross salary
- Any additional amounts you withdraw from your company are treated as dividends which do not attract national insurance, therefore you are not paying any unnecessary national insurance
- Please note that dividends are not a tax allowable expense for your company (unlike a salary) - so your company does not save corporation tax on the dividends
Many people choose to limit their total income to the basic tax band so as not to go into the higher tax band (£50,270 for 22/23), to ensure that their income is not taxed at the higher levels of tax, but this will be a personal choice and a balance will need to be made between tax efficiency and how much of the available profits in your business you want to take in a tax year.
The introduction of the employment allowance allows employers to not pay the first £4,000 of employer's National Insurance, which is the level it remains at for the 22/23 tax year. However, this isn't applicable if the only person on the payroll is a director. HMRC’s intention is, we understand, to block companies that have no ‘real’ employees from claiming the employment allowance (the government are trying to encourage small businesses to take on employees) – this is clear from the fact that the government have introduced even further restrictions on being able to claim the employment allowance from April 2020.
To keep things straightforward and lean on the cautious side, we advise freelancers and single employee companies not to attempt to claim the employment allowance and go with the simplest option - a monthly salary of £735/month. The reason for this is given below.
Optimum Directors Salary 2022/23: sole employee
Please note: We have made some key assumptions when preparing these calculations, namely:
- You are a UK resident
- You have no student loan balance
- Your only income is your salary and dividends from your company
- You have a standard personal allowance
- Your company has sufficient post tax profits to support these dividends
The most efficient salary for sole directors in 2022/23 is £758.33 per month.
If you’re the sole director and pay yourself a salary through your own limited company, the best amount to pay yourself is £9,100 per annum (or £758.33 a month). This is because:
- It’s at the secondary threshold so your company won’t need to pay employer’s NI on it.
- This salary is lower than the primary threshold, so you won’t need to pay employee’s NI.
- It’s above the Lower Earnings Limit, so you will still earn NI credits, which is great news for your state pension.
- This is less than the tax-free Personal Allowance threshold.
- A sole director cannot claim the Employment Allowance.
Optimum Directors Salary 2022/23: two or more directors in 2022/23?
Having 2 or more directors on the company payroll means that you’re eligible to claim the Employment Allowance.
The most efficient salary for 2 or more directors in 2022/23 is £823.33 per month.
The directors are able to take an annual salary at the primary threshold of £9,880 (or £823.33 per month) without incurring any NI.
Please note: in order to pay this level of salary, a payroll scheme must be in place with HMRC and the salary should be reported to HMRC through the payroll system on a monthly basis (known as RTI returns) – Whitehill are able to provide a full payroll service for this..