What is the optimum income for directors in 2021/22?

What is the optimum income for directors in 2021/22?

Paying yourself can be a complicated issue for many business owners. In the UK, directors and shareholders take dividends while some take salaries. 

What is the best way of taking finances out of your business and your optimum income? With tax thresholds and regulations constantly changing, doing your research is advisable. 

First, let’s understand the differences between a shareholder and a director.  This applies to limited companies and not sole traders. 

Company shareholders are those who actually own the limited company through their holding of shares. The shareholders appoint directors to run the company on their behalf. For a lot of SMEs the director is also the only or main shareholder.

Salaries and dividends

  • A salary may be paid to directors for performing their duties as an officer of the company.
  • A dividend may be paid to shareholders for their share of post-tax distributed profits.

For 2021/22 the personal allowance has increased from £12,500 to £12,570 – this means your first £12,570 of income is tax free. Meanwhile, the higher tax band has increased from £50,000 to £50,270. Anything earned over this is taxable at a rate of at least 40 per cent. The tax-free dividend allowance remains at £2,000.

Optimum income for 2021/22

What are the best and optimum ways of paying directors with the changes to the tax allowances now being in effect? 

If you’re a director of your own company, usually the most tax effective method is to take a low salary and top up your income with dividends. This is advised because taking a salary at the minimum level triggers a National Insurance record for your state pension whilst reducing your corporation tax bill.

Dividends will minimise your personal income tax liability and there are no National Insurance contributions to pay. 

You can only pay dividends if your company is making a profit after tax.  If a dividend is paid and the company does not have enough profits the dividends are treated as a loan and must be re-paid. 

There is also the additional factor of the Employment Allowance to consider. This allows the company to claim the first £4,000 of the employer’s national insurance contributions.  However, there are certain caveats within this, one of which is that if you’re the only employee and director you are not eligible.

For more details, you can contact us for details.