Directors Salary Review 2021/22

At the start of each new tax year (5 April), we calculate the optimum salary for owner managed business directors.

Based on our calculations, if a director wishes to extract funds in the most optimum way, a salary of £8,840 per annum would be best.  Expressed in monthly terms this would be £736 per month and in weekly terms £170 per week.

As a business owner you have freedom to decide how to remunerate your efforts.  You can take a salary under an employment contract or contract for services, take dividends from post-tax profits or mix the methods. The best choice for a director who has no additional taxable income sources would be to take this maximum director’s fee and top it up with dividends as needed.

How is the director’s salary 2021/22 calculated?

The most tax efficient director’s salary for 2021/22 is £8,840 per annum. This is down to the National Insurance (NI) rate limit known as the lower earnings limit or LEL which for 2021/22 is £6,240 per annum and the secondary earnings limit SEL is £8,840 per annum.

Provided that the director earns over the LEL, then they will qualify for a state pension in the future.  However, if their earnings from director’s fees take them over the SEL, then the company will be required to pay employer’s NI contributions.

The magic figure of £8,840 achieves a pension entitlement without any NI obligations.

Do you need to pay a salary in the first place?

As we mentioned above, a company can remunerate its directors through salaries or dividends, or a mixture of both.  The advantage of paying a salary is that it reduces the company’s Corporation Tax liability because, unlike a dividend, it is a tax-deductible expense.

In practical terms, the corporation tax saved on a salary of £8,840 to the director is £1,679.

When would not taking a salary be advisable?

If the director has other income sources or will pay considerable capital gains tax in this tax year, it would not make sense to pay a salary at all.  Moreover, if the director is over state pension age, there is no sense to boost NI contributions

Is it ever worth paying a director a salary above the year’s optimum?

Sometimes, it is.  This may be needed in order to avoid coming into conflict with the national minimum hourly wage. These rules apply if the director has a contract of services with the company and they’ll have to be paid £8.91 per hour/£62.37 per day/£311.85 per week/£16,216.20 per annum

Another such situation would be in very small companies where there is more than one director/employee, and the employment allowance is available.   The employment allowance 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 NI bill of £100,000 or less during the previous tax year.   By using the scheme, a company can write off the first £4,000 of its overall Employers’ NIC bill each year.  Here. it may be advantageous to uplift the salary to the level of personal allowance, which is £12,700 in the 2021/22 tax year

Dividends can only be paid by a company from its current year profits or distributable reserves relating to prior years.

Last year’s optimum directors’ salary

In 2020/21 this was £8,788.

What is the best option for me in 2021/22?

If the desired income will be more than £8,840, paying a dividend as a top up to the desired level makes more sense from a tax perspective than any additional salary. Firstly, dividends are not subject to National Insurance and secondly the income tax rates pertaining to dividends are lower than to salaries.

Example calculation:

Fernando wants to earn enough to avoid paying higher rate tax

Salary:                                                   8,840

Dividends                                            5,730

Total                                                      14,570

Less: Personal allowance               12,570

Less Dividend allowance                  2,000

Taxable Income                                Nil

The basic rate band threshold is £50,270 so an additional £35,700 of dividends can be paid without going into the higher tax rate and this additional dividend will be taxed at 7.5%.

Additional dividend                         35,700

Tax due at 7.5%                                 2,677


A small salary coupled with dividends is the best way to proceed for most small companies.  The recommended small salary will achieve a corporation tax saving of £1,679 and ensure state pension entitlement.

 SRC-Time are one of the South East’s leading accountancy firms in advising on all aspects  of business, taxation and corporate finance and we can assist in any issue raised above

Our expert team is available to provide you with advice and can be contacted on 01273 326 556 or you can drop us an email at  or speak with an account manager to get any process started.

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