Based on the update released by HMRC recently, the National Insurance rates and thresholds for company directors have also changed. Directors can now earn £11,908 in the 2022/23 tax year without paying any employee National Insurance.
As expected, this changes the advice provided to directors so we have outlined the details below. For more information on the updates to National Insurance, you can read the government guidance on rates and thresholds for employers 2022/23.
Previously, our advice to company directors was to pay themselves a salary of £9,100 a year to avoid paying any National Insurance (NI). However, with the increase in the threshold for employees and directors’ National Insurance, we would now recommend paying £11,908 in the tax year.
The reasoning for this and tax consequences are as follows:
The primary threshold (rate in which employees/directors pay NI) has increased to £12,570 from the 6th July 2022 – this equates to the £11,908 mentioned above for the 2022/23 tax year. If your earnings do not exceed this amount, then no employee National Insurance will be payable.
If you have no employees then you will not qualify for the employment allowance of £5,000 in the 2022/23 tax year. Therefore, any earnings over £9,100 will be subject to Class 1 National Insurance at a rate of 15.05%.
This equates to £422 payable in total in the 2022/23 tax year and this cost is borne by the company.
You might wonder why we are advising you to pay National Insurance when we haven’t previously. The reason for this is the saving in corporation tax.
As long as the director’s salary is reasonable for the duties performed for the company then it is deductible from the taxable profits of the company.
If you increase the salary paid by £2,808 in the tax year, that will equate to a corporation tax saving of £533. Then, on top of that, the Employer National Insurance paid by the company is also an allowable deduction, saving an additional £80 in corporation tax.
In summary, the company would have to pay an additional £422 in National Insurance, but the saving in corporation tax would come to £613, leaving you with an additional £191 in the bank.
We know this is only a small saving but, in these times, every little tax return helps!
There are 2 scenarios under this bracket, and this depends on whether you utilise the £5,000 employment allowance – this was increased from £4,000 in the spring budget.
Under this option, you would be in the same bracket as a sole director with no employees, so an additional Employer National Insurance liability would be incurred of £422 but the corporation tax saving of £613 would outweigh this.
Again, you would be better off paying the £11,908 in the current tax year as you will pay £191 less in tax.
If your employer’s National Insurance bill in the 2022/23 tax year is expected to be less than £4,577, then you can pay yourself £11,908 without incurring any additional Employers’ National Insurance.
Please note the above is based on a one director company. For every additional director, deduct an additional £423 from the £4,577 expected Employers’ National insurance liability above.
Under this option, for each director paid a salary of £11,908, the company will save £533 in corporation tax compared to if they stick to the £9,100 previously advised.
For this situation, the best option is again to pay the £11,908 salary in the 2022/23 tax year. By doing this, you are potentially saving £533 per director.
In making the above change to your salary as a director, there are also the following implications you need to take into account:
If we run the payroll for your company, you do not need to worry about the above as we will use Xero accounting software to automatically ensure the amount you are paid is updated to the most tax-efficient amount.
We do hope you found the above helpful and if you have any queries at all, please do not hesitate to get in touch.
If you are looking for an experienced team to manage your payroll, cash flow, or any other aspect of your business or personal finances, Sidaways are forward-thinking accountants in Exeter.
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Dan Routcliffe
Email: dan@sidaways.co.uk
Tel: 01392 360008
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