What is the most tax-efficient shareholder director’s salary for 2023/24?

The primary threshold for Class 1 employees’ NICs is now aligned with the personal allowance of £12,570 per annum. 

For directors, NICs are calculated on an annual cumulative basis. This means that the year-to-date salary is assessed against the threshold when each salary payment is made and it is only when the threshold is breached that the director will pay employees’ NICs. 

The level at which Class 1 employers' NICs are paid remains at £9,100 per annum. This has been consistent from 6 April 2022 and is often what it is recommended that a director shareholder should take as a ‘threshold salary’.

In terms of what a director shareholder should pay themselves post 6 April 2023, this will be based on a number of factors. 

Generally, continuing to set the salary level at the Class 1 employer NIC threshold of £9,100 for the year, may for many be the preferred position, since it will mean that no payroll deductions are required to be made for the company thereby reducing the amount of administration necessary. This will also ensure the year is a qualifying one for state pension purposes, whilst no NICs will actually be payable. 

There potentially could be a worthwhile saving however, if the salary is increased to the Class 1 employees’ NIC threshold of £12,570 for the year, since the additional salary will be liable to relief from Corporation Tax at a rate of at least 19% (and potentially as much as 25%/26.5% from 1 April 2023), whereas any Class 1 employers’ NICs payable will only be at a rate of 13.8% (which itself is tax deductible for the company).

It should also be noted that, if there are a limited number of employees, the employment allowance of £5,000 may remove any employers' NICs cost altogether, therefore meaning that an increase in salary to the Class 1 employees’ NIC threshold could be even more beneficial since there could potentially be a nil or reduced employers’ NICs cost to doing so.

Directors can elect to use the alternative basis, this results in the director’s NICs being calculated by reference to the threshold for the pay interval, as for other employees. A revaluation is performed at the time of the last payment using the annual thresholds, and any contributions still owing are deducted from the final payment. If the final payment is insufficient to cover this deduction, the payment must be made by the company.  If this method has been adopted and it is beneficial to increase the salary to the employee threshold (£12,570 as noted above) the monthly salary for the year is based on the threshold (£12,570 divided by 12). This will ensure no NICs are deducted from the salary.

There is no one size fits all answer and therefore advice should be sought to consider the optimum position.

If you would like any further information, then please contact our tax experts at js.tax@jsllp.co.uk.