As in previous years we’ve set out what we believe to be the most common optimum, then end with a few exceptions. Just to clarify the below are suggestions for the tax year starting from 6 April 2022 and assume any company work completed falls outside IR35.
The “most common” situation: We have opted for a salary that will trigger some employer NICs, but not employee NICs. Whilst paying over this employer NIC liability will be a small extra hassle, it’s just one extra company payment towards the end of the tax year end, which we will notify you of.
For one person companies in 2022/23, we therefore recommend a salary of £992/month. This replaces £797/month for 2021/22. It’s the maximum before employee NICs become payable for directors yet is still sufficient to count as a contributing year towards basic state pension. Be aware there will be a small amount of employer’s NICs payable on this salary shortly following the tax year as mentioned above.
Based on the above salary (£11,904 for the year) and no other personal income, you can take dividends of:
– £2,666 and suffer no personal tax (0%) – £38,366 (ie an extra £35,700) and suffer £3,123.75 personal tax (£35,700 at 8.75%) – £88,096 (ie an extra £49,730) and suffer £19,907.63 personal tax (the above £3,123.75, plus £49,730 at 33.75%)
The above thresholds are not hard limits, just the levels above which the marginal rate of tax increases (i.e., the amount of tax suffered on each extra £ of dividend taken). Above the top limit (£100k total income) you start to lose your personal allowance, so the effective tax rate becomes increasingly penal.
Exceptions: – 2+ staff – for those with 2+ people on the payroll but overall, very modest salaries (so £5k employment allowance won’t be fully utilised) and preferring tax savings over simplicity, you may choose to opt for the slightly higher salary of £1,047/month (same as 2021/22). This will incur employee NICs, but still no PAYE as under the personal allowance, and the employment allowance will negate the employer NICs. In practice this will save a couple of hundred quid over the year but be aware staff net pay won’t consistently equal their gross pay, so there will be deductions to pay over to HMRC towards the end of the tax year. Please also note this extra ~£660 salary over the year impacts on the dividend thresholds, effectively £2k tax free, £35.7k basic rate (£37.7k total dividends), £49,730 higher rate (£87,430 total dividends). If in doubt, just go for the lower £992/month.
– Student loans/higher income child benefit charge – these aren’t really exceptions as such, but things to be aware of that can increase what you must pay. If you have an outstanding student loan or claim child benefit, and your total overall income is above the thresholds, then there will be additional charges of loan repayments and/or having child benefit clawed back. For higher income child benefit this is £50,000. For student loans it depends on the plan:
– plan 1 – £20,195 (9% on earnings above this).
– plan 2 – £27,295 (9% on earnings above this).
– plan 4 – £25,375 (9% on earnings above this).
– postgraduate loan – £21,000 (6% on earnings above this).
If you don’t want to be overly concerned with the precise details, then the general logic isn’t surprising. In most situations, as personal income goes up, the tax rate goes up.
Also, don’t be concerned about possibly dribbling just above a threshold. If for example you went £10 into the higher rate band, it just means that top £10 of your income would suffer 33.75% instead of 8.75%. There’s no sudden sting for going pennies above a threshold.
Where we process payroll on your behalf, we will look to update your salary based on our above recommendations.