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Directors Salary 2023

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Directors Salary 2023

If you operate your business through your own UK limited company you’ll most likely want to use the optimum tax planning strategy of extracting money from your company through a combination of shareholder dividends and a low salary. 

Personal Allowance

The personal allowance (the amount of income that you can earn before you pay tax) in 2023/2024 remains the same as 2022/2023 at £12,570.

Income Tax Thresholds

Income between £12,570 and £37,700 (Basic tax rate) – 20%

Income between £37,701 and £125,140 (Higher tax rate) – 40%

Income over £125,140 (Additional tax rate) – 45%

Dividend Allowance

The Dividend Allowance is reduced to £1,000 from £2,000 for the 2023-2024 tax year. This is the amount of dividends you can receive from your limited company free of tax.

Dividend Tax Rates

Dividends within basic tax rate – 8.75%

Dividends within the higher tax rate – 33.75%

Dividends within the additional tax rate – 39.35%

National Insurance Thresholds

Lower Earnings Limit

By paying a salary above this amount, you are protecting your entitlement to future state pension and benefits, without paying any national insurance.

£533 per month/£6,396 for the year

Primary Threshold

If you earn above this level you personally have to start paying national insurance contributions.

£1,048 per month/£12,570 for the year

Secondary Threshold

If you earn above this level, your company has to start paying employers national insurance contributions but you do not pay employee national insurance.

£758 per month/£9,100 for the year

Employers National Insurance Allowance

This scheme was implemented to help stimulate economic growth and encourage small firms to take on more employees. It is open to all businesses with a total national insurance bill of £100,000 or less during the previous tax year.

Sole director companies without additional employees cannot claim the allowance.

The Employers Annual Allowance continues for those companies employing staff, enabling your company to reduce its annual National Insurance bill by up to £5,000. This remains unchanged from last year. 

You must be an ‘eligible employer’ to qualify for this allowance. Please check with us to make sure that you qualify for this allowance if you’re uncertain.

How much salary should I pay myself?

It is important to receive bespoke and tailored advice to your personal circumstances as everyone is different. 

There are also more aspects to consider than just tax, including:

  • Tax Rates and Thresholds for the tax year
  • The number of other directors or employees in the company
  • Other sources of personal income (aside from the limited company)

Childcare arrangements, pension contributions and charitable donations all need to be taken into account. 

It is also important to consider any future plans you may have. For instance, if you’re considering mortgage or finance applications as your pay structure may affect your eligibility.

Sole Director & Only Employee

If you’re the sole director and pay yourself a salary through your own limited company, the best amount to pay yourself is typically £9,100 per annum (or £758 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, i.e £12,750, leaving some of your personal allowance free for other income.
  • A sole director cannot claim the £5,000 Employment Allowance.
  • The salary is deductible for corporation tax purposes (generating a tax saving for the company about £1,729) (£9,100@19%).

Please note dividends should always be transferred separately to your salary and must have a payment reference of ‘’Dividends’’.

Two or more directors (or employees)

Having two or more directors on the company payroll means that you’re eligible to claim the £5,000 Employment Allowance.

There are a couple of scenarios:

More than £5,000 employers national insurance is likely to be incurred

Depending on the number of employees and their salaries, more than £5k Employers NI may be incurred by other employees before even considering the Directors payroll.

In this scenario, adding Directors salary above £758 per month will simply add to the National Insurance bill and the optimal salary is therefore £758 per month as it is for sole Directors (see above).

Less than £5,000 employers national insurance is likely to be incurred

For companies with only two Directors or a small number of employees Employers NI incurred on salaries above £758 per month may be waived by the Employers Allowance.

In this scenario the optimal salary will be £1,048 per month/£12,750 per year. Although Employees NI will be incurred it will be more than compensated for by the tax saving in Corporation Tax.

Conclusion

Our general recommendation for two or more directors is to pay a gross salary of £1,048 per month/£12,570 for the year but this is dependent on your circumstances and how many other employees are within the company.

  • The salary is tax deductible, reducing the company’s profits and it’s tax liability
  • You do not need to pay any income tax or national insurance personally
  • You will need to operate a payroll system and submit an RTI (Real Time Information) return to HMRC for each pay period.
  • Your company will need to pay employer’s national insurance for the year but if you’re eligible to claim the Employers National Insurance Allowance, payment may not be required.
  • Your National Insurance record will be credited, even though you will have not actually paid any contributions. This protects your future entitlement to state benefits such as a pension.
  • If you would prefer to avoid the added administrative burden of making regular Employer’s National Insurance payments to HMRC or if you’re unable to claim the Employers National Insurance Allowance for any reason, you may prefer to opt for a lower salary of £758 per month/£9,100 for the year. Payment at this level avoids all National Insurance issues and is usually more suitable for those with additional sources of income.

Please note numerous assumptions have been made when concluding the figures above. The amounts may not be the most appropriate for every Director. The figures in this article are only provided as guidance.

How do I close my limited company?

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Reasons why you may consider closing a limited company

There may be a variety of reasons to consider closing your company.

Some of reasons company owners decide to cease trading are:

  • The business is no longer profitable or viable
  • You are taking a permanent role as an employee
  • You have decided to retire
  • You have decided for lifestyle reasons
  • The limited company structure no longer suits you from a tax or admin point of view.


    Ways to close down your limited company

    The two main ways to close a limited company are:

    1. Members’ voluntary liquidation (MVL)
    2. Voluntary strike off

    You could also make your limited company dormant if you think you may want to use it again in the future.

    Voluntary Strike Off

    A limited company can be voluntarily struck off the Companies House register providing it is solvent (i.e. able to settle any outstanding debts) and no longer trading in any form. The directors can be held to be personally accountable if the company is struck off without settling all its debts. Before applying to strike off a limited company, it must be closed down legally.

    A voluntary strike off is a fairly simple process that doesn’t require specialist advice and this is generally the best approach where the company’s retained profits are below £25,000.

    A company is eligible for striking off if it meets certain conditions:

      • During the previous three months, the company should not have traded or otherwise carried on business;
      • During the previous three months, the company should not have changed its registered name; and
      • There should be no threats of liquidation against the company or any creditors’ agreements in place (e.g. CVAs).

        The application form to strike off the company (DS01) can be submitted to Companies House provided the company hasn’t traded for a period of three months. If the company has never traded, the closing down process is quicker as you don’t have to wait for a three month non-trading period to pass before submitting the application.The company bank  account needs to be closed as part of the three month non-trading period to ensure no transactions pass through it, otherwise HMRC consider this as still trading.If registered for VAT, PAYE and corporation tax, the company also needs to notify HMRC of the intention to close the company.

        On receiving the application, Companies House will publish notices in the London Gazette to give any interested parties the opportunity to object to the striking off. Companies House will also check with HMRC to establish if there are any outstanding tax liabilities. The striking off process will take a couple of months to complete.

        Company accounts will need to be prepared up to the final date of trading. These accounts will need to be submitted to HMRC with a final corporation tax return for the same period. Corporation tax will need to be paid as usual if there are taxable profits in the final trading period, so you will need to ensure that this tax, and any other liabilities are settled before you close the limited company bank account.

        Extracting profits with less than £25,000 retained profits by Voluntary Strike Off

        For any amounts up to the limit of £25,000 or under, profits can be extracted from the company and redistributed to shareholders as capital gains.

        You will pay the regular rate of Capital Gains Tax but there is an annual allowance of £12,300 in the 2022-23 tax year which means that gains up to this amount will not be subject to tax.  Any gains exceeding this allowance will be taxed at 10% for a basic rate taxpayer, or 20% if paying more than the basic rate of Income Tax.

        However, if you’re eligible to apply for business assets disposal relief you will pay a tax rate of 10% on the disposal, regardless of the rate of personal tax you pay.

        Extracting profits with more than £25,000 retained profits by Voluntary Strike Off

        If the company’s retained profits are in excess of £25,000, these are usually distributed among the company’s shareholders in the form of a final dividend. Shareholders will be required to pay income tax at their relevant personal income tax rates, which will depend on whether profits are taken as salary or dividends or a combination of the two.

        Directors who receive dividend payments are liable to pay income tax on any payment above £2,000. Dividends attract income tax at the current dividend rates 8.75%, 33.75% and 39.35% in the 2022-23 tax year, depending on your marginal rate of personal tax.

        If your retained profits are above £25,000 you should speak to an accountant to try and find the most tax efficient way to reduce your retained profits to the £25,000 figure for maximum tax efficiency.

        Members Voluntary Liquidation (MVL)

        The alternative approach is a Members Voluntary Liquidation (MVL), where a solvent company’s assets are turned into cash and then distributed to shareholders.

        The main tax advantage of closing a limited company using MVL as opposed to Voluntary Strike Off is that the distributions of retained profits amongst shareholders are subject to CGT (as opposed to dividends tax or income tax). If you have cash reserves over £25,000, you could extract the profits whilst paying tax at a rate of just 10% by using an MVL. This allows you to close your limited company in the most tax efficient manner.

        Whilst £25,000 is the legal threshold for qualification for MVL, most financial experts agree that you need around £35,000 of clear profit for MVL to start to become really advantageous due to professional liquidators fees. Unlike Voluntary Strike Off, there is no differentiation of profits above or below £25,000. All profits will come under CGT.

        With an MVL, instead of taking the retained profits as a final dividend (which counts as taxable personal income), the profits are distributed to shareholders as a capital gain, and so is subject to capital gains tax rather than income tax. This is the key difference, as it can mean a much lower final tax bill if you also qualify for Business Assets Disposal Relief, with the tax rate being 10%. However, you would need to appoint a licensed insolvency practitioner to manage the process and this usually costs several thousand pounds. Also, the process can take up to 12 months to fully complete. Even taking into account the insolvency practitioners fee, an MVL can out much less costly if you have large retained profits.

        If the balance sheet reflects retained profits of more than £35,000, these profits can be distributed as either a director’s salary or a dividend and the shareholders will be taxed at their relevant tax rates. Whilst this may be beneficial in terms of making use of income tax free brackets, the downside is that where these retained profits are distributed as a final dividend, the dividend tax rates that apply to a strike off are either 8.75%, 33.75% and 39.35%, depending on your marginal rate of personal tax.

        Regardless of your marginal rate it is usually going to be better to bring the retained profits down to £25,000 and take this as a capital distribution upon closure and paying tax of £1,270 (£25,000 profits less £12,300 capital gains allowance for the 2022/23 tax year, leaving £12,700 to be taxed at 10% business assets disposal relief, assuming you are eligible.

        If some of the retained profits are paid as salary to a director (rather than as a dividend) then the amount of tax paid depends on the director’s personal rate, which is usually higher than the dividend tax rate and may also mean there are National Insurance Contributions for the company and director to pay as well.

        Distributions from the voluntary liquidation of a company may be subject to Income Tax under the following circumstances:

          • The company is a ‘Close Company’ (i.e. has five or fewer shareholders)
          • Within two years after receiving a distribution the owner is involved with a similar trade or activity
          • The winding up of the company appears to be to reduce tax.

            Other considerations

            An MVL cannot be used by directors who intend to set up another company after closing their current limited company and extracting the profits.

            If a company is struck off when its share capital or non-distributable reserves or any other assets have not been distributed to shareholders, that undistributed property will become the property of the Crown, by virtue of Bona Vacantia.

            Once struck off a company can be restored to the Companies Register within six years of dissolution, however this can be quite a complex process.

            Business documents must be kept for 7 years after the company is dissolved.

            If your company cannot pay its debts, you cannot apply for a voluntary strike off and you may have to liquidate your company by way of a MVL.

            Questions?

            If you have any questions about closing your limited company, please get in touch and we will be happy to help! You can call us on 01386 366741.

Sole Trader or Limited Company?

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When most people have decided to set up their own business, the first issue they encounter is how to do this. This inevitably leads to the question, should I operate as a sole trader or start my own limited company? There is no right or wrong answer and it depends. There are many factors to consider and many advantages and disadvantages to setting up as either.

The decision often depends on the personal preference of the person who owns and runs the business and the type business they are operating. There is never one standard answer for all businesses so it is worth spending the time to consider this carefully. It is about finding the right business format for the individuals involved as there is no easy answer. The decision should always be made on the specific business and what is important to the individuals concerned.

Firstly, lets get the formalities out of the way. Any individual of any nationality may register a limited company subject to a few conditions:

• They are not an undischarged bankrupt
• They have not been restrained by court order
• They are not subject to UK government restrictions

You can become a director of a limited company from as young as 16 years old.

The Advantages of a Limited Company

• Perhaps the most attractive benefit of trading as a limited company is the aspect of limited liability. Essentially this protects the personal assets of the officers should the company run into financial difficulties. Financial liability is limited to what has been personally invested.

• There are potential tax savings in terms of remuneration. The most efficient strategy is to pay the directors a low salary which is supplemented through payment of dividends and subject to lower tax rates (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers). A dividend is is a payment made to the company owners from the profits of a company after corporation tax has been accounted for.

• The ownership of a limited company can easily be divided up through the sale of shares – the shares can be further used as a means of generating capital.

• A company is more than just the people in it, and still exists even when members resign, retire or die.

• Companies can create mortgages or floating charges over assets, making it easier to borrow money.

• Perception. Limited companies tend to instil added confidence in suppliers and creditors. Many large organisations will only conduct business with limited companies. An example of this is the IT sector where it can be difficult to obtain contracts unless you trade through a limited company.

The Disadvantages of a Limited Company

• Setting up a limited company means a lot of paperwork due to a higher level of regulation and legislation. There is also ongoing administration, such as filing annual accounts and the annual return with Companies House each year.

• Company accounts and shareholder details are publically available on Companies House website.

• Shareholders and directors may have to personally guarantee contracts entered into with lenders or suppliers.

• Winding up a company is more complex and expensive than a sole trader business or a partnership. Consideration should be given to the longevity of the business.

• Mortgages and insurances such as critical illness cover may all be affected by a typical Limited Company form of remuneration which involves the payment of a low salary supplemented by a higher level of dividends.

If that’s not enough, there are other considerations too:

• Losses can potentially be relieved sooner through a sole trader than a limited company.

• Company cars are rarely tax efficient – unless electric vehicles. Business use versus personal use of a car or van needs some thought and whether this is to be owned personally or by the company.

• The extent to which profits will be retained in the company to fund capital expenditure and expansion.

• It’s also important to be aware that companies pay corporation tax on their profits. The taxable profits of a company are arrived at after deducting all salary payments including those paid to the directors. Dividends are not considered a business expense when calculating Corporation Tax. Company law requires that dividends are paid out of a company’s retained profits – whatever is left after corporation tax has been charged on the profits. It is illegal to pay a dividend if your company does not have sufficient profit after tax available to cover the dividend amount.

• You can earn up to £1,000 in dividends in the 2023/24 tax year tax free. This is reducing to £500 in the 2024/25 tax year.

• In a limited company the profits stay in the business until you pay them to yourself as a dividend. You can pay yourself a tax efficient salary below the tax and National Insurance thresholds, avoiding tax and National Insurance yet still qualifying for national insurance credits against your National Insurance record.

• Sole traders pay both tax and national insurance on their profits and are very restricted as to how they reduce these payments, a limited company gives you greater control and flexibility in how you pay yourself. Sole traders also have to make payments on account in advance of their next tax bill twice a year, which can create cashflow issues. Limited companies do not need to make payments on account (unless a large company).

• The amount of corporation tax depends upon the level of profits. From 1 April 2023 the main rate of Corporation Tax increased from 19% to 25% but the small profits rate of 19% applies to single companies profits of less than £50,000.

There is no ‘best way’ and all options should be considered in conjunction with professional advice to ensure your personal circumstances and preferences are fully taken into account.

Based in the Heart of Evesham, The Accountancy Office are here to help with all of your accountancy needs.

If you wish to discuss any aspect covered in this article please don’t hesitate to call 01386 366741 or email us here.

Director Charging Rent for Use of Home

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If your company is based from your home you may wish to consider formalising an arrangement with your company to rent part of your residence to the company to occupy for business use. The benefit of this is that by charging the company rent, the company’s corporation tax bill will be reduced.

What do I need to do?
You cannot charge your limited company rent unless there is sufficient evidence of the arrangement so you will need to set up a formal rental agreement between yourself and the limited company. This is straight forward to do and templates are readily available. You should also ensure that you have a Board Minute recording the agreement. Providing the rental agreement clearly sets out that the company will not have exclusive use of that part of the home then this arrangement will not create capital gains tax implications if you sell the property in the future.

How much rent do I charge?
The rent that is charged to the company should be reasonable and justifiable and not in excess of commercial market rental values of serviced office space – research these locally. Also, bear in mind that if the amount of rent charged to the company, which then is subsequently paid to you, exceeds the household costs that you have personally incurred for that area of space you will be taxed on the difference which is regarded as rental profit. If you want to avoid this, the rent that you receive from the company should equal the costs paid by you.

Firstly, calculate the annual costs of running your home and consider the following expenses:

  • Rent or mortgage interest (note that only mortgage interest can be claimed, not the capital element)
  • Water rates
  • Light and heat
  • Insurance
  • Repairs
  • Cleaning
  • Repairs or re-decoration of home office

The rent charged should include use of all services that are provided to the company from the home but be careful with telephone costs. If you are utilising a private residential telephone line, you can only claim the cost of the business calls. You cannot claim the cost of line rental as this will be treated as a benefit in kind on which you will pay tax. HMRC argue that the line rental would have been paid anyway without business use as it is already installed for your own private use. If you have a separate business line installed, in the name of the company, then all costs are allowable and VAT can be reclaimed as usual.

If the broadband account is in the company name and any private use is not significant then there is no taxable benefit for internet usage. If the account is personal then you may only claim a proportion of the bill based on your business usage.

A simple example

Say that the total running costs were £14,000 per year. You will need to proportion these costs based on the amount of space occupied by the company. This can be done based on the number of rooms within the property or the total floor area of the household. Either method is acceptable providing you use the most accurate method based on all circumstances, such as the size of the property and the number of rooms within it. Adjustments also need to be made based on the amount of time that the room is utilised by the company.

Bob runs his company from a spare bedroom within his house five days per week. The house has a total of six rooms, all the same size. The costs would be apportioned as follows:

£14,000 ÷ six rooms = £2,333 per room.

Usage is five out of seven days so the costs are reduced by £2,333 x 5/7 = £1,666

£1,666 is the annual rental charge to the company for the year and the company’s profits are reduced by this amount which also reduces the corporation tax liability.

Bob will also need to record enter £1,666 rental income onto his personal self assessment tax return but he will not be taxed on this amount because the associated costs of running the home of £1,666 are also entered onto the tax return so the profit to Bob is nil.

Note
This is a very simplistic example and your accountant will be able to help you based on your specific circumstances.

Directors should also ensure that their mortgage lender or landlord permits the property to be used for business purposes and that the household insurance is not adversely affected.