The UK National Minimum is the minimum pay per hour a UK business can legally pan an employee from April 2022. The Government review and establish this wage every year to ensure that workers receive a wage that covers the basic living costs.
The increase in April 2022 represents an increase of 6.6% to the living wage bringing the pay of millions up to £9.50 per hour, see table below:
Age | Minimum Rate from April 2022 | Minimum Rate from April 2021 | Percentage Increase |
23 and Over | £9.50 | £8.91 | 6.6% |
21 to 22 | £9.18 | £8.36 | 9.8% |
18 to 20 | £6.83 | £6.56 | 4.1% |
16 to 17 | £4.81 | £4.62 | 4.1% |
Apprentice | £4.81 | £4.30 | 11.96% |
Accommodation Offset | £8.70 | £8.36 | 4.1% |
The minimum wage rates apply to all UK workers even if they are not paid by the hour, so you must ensure this is calculated carefully.
The minimum wage does not apply to workers who are self-employed, company directors, unpaid volunteers and family members who live in the home of the employer and do household chores.
Rules for Apprentice Pay
Apprentices are entitled to the apprentice rate if they are either
· Aged under 19
· Aged over 19 and in the first year of their apprenticeship
Example
An apprentice aged 21 in the first year of their apprenticeship are entitled to a minimum hourly rate of £4.30.
Apprentices are entitled to the minimum wage for their age if they are both:
· Aged 19 or over
· Have completed the first year of their apprenticeship.
Example
An apprentice aged 21 who has completed the first year of their apprenticeship is entitled to a minimum hourly rate of £8.36.
Now we come to the Directors Optimum Salary for 2022/23. The personal allowance in England and Wales remains at £12,570 – this means your first £12,570 of income is tax free. In addition to this the higher tax band remains at £50,270 for this year.
For income above this the tax rates are as below (different rates apply to dividends)
· £12,570 to £50,270 20%
· £50,271 to £150,000 40%
· £150,001 + 45%
Scottish resident taxpayers have slightly different tax bands.
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 below, this represents a 1.25% increase to all bands this year as announced by the Prime Minister as part of a package of measures to fund the costs of social care and the NHS.
· Any un-used personal allowance (£12,570), that element is tax free.
· Any dividends in the basic tax band (up to £50,270) tax rate is8.75%
· Dividends above the basic tax band (over £50,270) are charged at 33.75%
· Any dividends in the upper tax band (£150,000+) are taxed at 39.35%.
Owner managed businesses can typically decide how to pay themselves. This can be either a salary, dividends, or a mixture of both. Directors, with no other income should look to pay themselves the optimum director’s salary with additional income paid as dividends.
So, how does this work? In simple terms the optimum Directors salary is the most tax efficient amount for, the majority, of directors to pay themselves. This will change from year to year as it is dependent on the National Insurance threshold set by the Government in any given year. For 2022/23 tax year this optimum is £11,908 per annum, which equates to £992 per month.
How this works in principle When it comes to tax efficient salary levels for 22/23 there are three national insurance thresholds you need to be aware of:
· Lower Earnings Limit – paying a salary above protects your entitlement to future state pension and benefits, without paying any national insurance. For 22/23 this is £533 per month.
· Primary Threshold – earnings above this threshold and you personally must start paying national insurance – for 22/23 this is £823 per month.
· Secondary Threshold – earnings above this threshold and your business must start paying national insurance – for 22/23 this is £992.00 per month.
Therefore, the Secondary Threshold is optimum level this ensures you are paying enough to qualify for the state pension but neither you nor your business have to pay National Insurance contributions.
How has the optimum Directors Salary Changed? Every year the income tax and NI rates change. Consequently, the optimum director’s salary changes every tax year, as you will see from the table below:
Tax Year | Annual Salary | Monthly Salary |
2022-23 | £11,908 | £992 |
2021-22 | £8,838 | £736 |
2020-21 | £8,788 | £732 |
2019-20 | £8,628 | £719 |
Why the big jump this year?
In the Spring Statement held on 23rd March 2022 the employees NI Primary Threshold was increased to match the personal tax allowance amount of £12,570. However as this will only commence from 6th July 2022 the earlier months remain at the original amount of £9,880 per annum. As a result the employees NI threshold is only £11,908 for the tax year 2022/23. This will increase to £12,570 from tax year 2023/24.
Why not pay £nil salary? A salary paid is a tax deductible whereas a dividend paid is not a tax-deductible expense for the company. Therefore, paying a salary of £11,908 to the director saves corporation tax of £2,262.52. There is no such saving on dividend payments. Also, by paying a salary of £11,908 you are ensuring another qualifying year for the state pension as mentioned above.
Caveats The Employment Allowance last year was £4,000 this will increase to £5,000 for 2022/23. Typically the employment allowance means that it is slightly more tax efficient to take a gross salary all the way to the tax free personal allowance level (£12,570 for 22/23), however HMRC over the years have brought in more and more restrictions as to who is entitled to claim the employment allowance – one of which was where they said the employment allowance would not be available to companies where the only person on the payroll is a director, i.e. ‘single director employee’ limited companies.
In order to keep things straightforward, we have not taken the employer allowance into consideration for these calculations, which also assume the following:
· You are resident in the UK.
· You don’t have an outstanding Student Loan.
· Your only income is your salary and dividends from your company.
· You are not working inside of IR35.
· You have a standard personal tax allowance.
· Your company has sufficient post tax profits to support these dividends.
How to optimise salary and dividends for directors in 2022-23? With regards to dividends, assuming you wish to take dividends up to the higher tax band but no further, then this would leave you with £38,362 of dividend headroom (£50,270 higher tax band – £11,908 salary).
The personal tax on dividends of £38,362 would total £3,123.75 – this is calculated as below:
· £662 of the dividends are in the allowance (£12,570 less £11,908 salary)
· £2,000 of the dividends are in the tax-free dividend allowance.
· This then leaves the balance of dividends totalling £35,700 to be taxed at 8.75% = £3,123.75
This will give you a net monthly salary of £3,928.85