Each year company directors have a decision to make to determine whether they need to change their monthly salary for tax efficiency purposes. When it comes to a tax efficient salary for the 2021/22 tax year there are three national insurance thresholds to be aware of:
Lower Earnings Limit (LEL) – as long as you pay a salary above this you are protecting your entitlement to future state pension and benefits, without paying any national insurance. For 21/22 this is £520 per month, £6,240 for the year
Primary Threshold (PT) – if you earn above this you personally have to start paying national insurance – for 21/22 this is £797 per month, £9,568 for the year
Secondary Threshold (ST) – if you earn above this your business has to start paying national insurance – for 21/22 this is £736 per month, £8,840 for the year
The above highlights that the optimum salary level would be to go up to the ST but not any higher. We suggest a monthly gross salary of £735 which stays just below this threshold and means no tax or national insurance deductions will be payable, i.e. your gross and net wage will remain the same.
Not everyone’s circumstances are the same however and it is important to stress as a company director it is completely your choice what level of salary you choose to pay yourself. Commercial considerations and personal circumstances should always form a part of your decision making.
