Directors salary 2022/23

Optimum salary

Didn't find your answer?

with the change in NI thresholds now coming part way through the year, I'm struggling to get my head around what to advise clients to take and when

whilst I know it should be simple enough, I'm currently recovering from covid and have a large amount of brain fog at the moment :(

Replies (52)

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By Wanderer
24th Mar 2022 10:12

Why not put your workings up?

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By Duggimon
24th Mar 2022 10:14

Assuming no other income sources and all normal with a single director company, it's probably most efficient tax wise to go £758 until July then £1,047.50 from then, however they'll likely then be paying employer contributions so the small saving has to be weighed up against the admin of having to make payments.

I make the overall saving about £177 for 2022/23 compared with just taking £758 per month all year, please anyone feel free to correct me on that though!

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Replying to Duggimon:
By ireallyshouldknowthisbut
24th Mar 2022 11:25

I think it comes down to use of the rest of the nil rate band for income tax and how reliable the client is with reference to making the PAYE payments.

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Replying to Duggimon:
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By alisonis
24th Mar 2022 11:11

So what is it for a single director company not wanting to pay employers NIC? I cant see that a new secondary threshold for Class 1 NIC has been announced - just a new primary threshold. Normally it is the secondary threshold that dictates the optimum salary as this means the director can continue to qualify for state pension payments but not pay any NIC.

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Replying to alisonis:
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By JimMcG
28th Mar 2022 15:56

Rebecca Cave confirmed March 24 on AccountingWEB that the secondary threshold has not change so remains at £758/mnth, £9,100 p.a.

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Replying to JimMcG:
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By alisonis
30th Mar 2022 13:31

Got it so £9100 is optimum salary for ltd co with one salaried director for 2022/23.

If on other hand employer qualified for Employment Allowance then optimum salary would be £12,570. Simples

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Replying to JimMcG:
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By alisonis
30th Mar 2022 13:31

Got it so £9100 is optimum salary for ltd co with one salaried director for 2022/23.

If on other hand employer qualified for Employment Allowance then optimum salary would be £12,570. Simples

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Replying to alisonis:
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By lionofludesch
30th Mar 2022 14:05

alisonis wrote:

Got it so £9100 is optimum salary for ltd co with one salaried director for 2022/23.

If on other hand employer qualified for Employment Allowance then optimum salary would be £12,570. Simples

That's the basic rule of thumb, yes.

Though it needs reviewing in more complex cases.

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Replying to Duggimon:
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By Mr_awol
24th Mar 2022 11:44

Duggimon wrote:

Assuming no other income sources and all normal with a single director company, it's probably most efficient tax wise to go £758 until July then £1,047.50 from then, however they'll likely then be paying employer contributions so the small saving has to be weighed up against the admin of having to make payments.

I make the overall saving about £177 for 2022/23 compared with just taking £758 per month all year, please anyone feel free to correct me on that though!

As a director, subject to annual NICs, would you not either:
a) Go full on from the start, or
b) Make up the shortfall after the rules change?

I haven't actually looked at this year, but had assumed i would be doing one of those two things. Your proposal seems to be the path of least effort but not necessarily the optimal figure.

As such, if you/we are to pump it up to £12,570 in total, then the saving will probably come out a bit more.

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Replying to Mr_awol:
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By Adam12345
24th Mar 2022 12:38

Nope. I thought this originally, but the draft legislation accounts for this.

The annual earnings limit for directors is £11,908.

The most beneficial salary IMO would be £823 per month for the first three months and £1,047.50 for the last 9 months. This is providing the company is profitable to get the additional corporation tax relief and the employer NI allowance is not available (either not qualifying or used by other employees).

You could process the salary as £992.33 (£11,908 / 12) and achieve the same results.

Some clients are extremely complex - those above state pension age, remaining employers NIC allowance etc. However, the tax savings between the various combinations are not huge.

Looking forward to April 2023, the rise in corporation tax is going to give us great fun - salaries may become more tax efficient than dividends for some clients!

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

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Replying to Adam12345:
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By rmillaree
24th Mar 2022 12:56

"You could process the salary as £992.33 (£11,908 / 12) and achieve the same results."

Ok if you can do 992.33*12 or x amount * 12 why is anyone recommending doing lower earlier and higher later?? - plot lost i have certainly most.

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Replying to rmillaree:
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By Adam12345
24th Mar 2022 13:10

Software might not be updated in time to allow this to work. But if it is, and the director's NIC is calculated annually, it will work.

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Replying to Adam12345:
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By rmillaree
24th Mar 2022 13:27

"Software might not be updated in time to allow this to work.

Surely it will work whether software is updated or not anyway ? unless i really have lost the plot or turned into yoda. Hmmm i do look more like yoda by the day.

surely there cant be anyone left who doesnt use the annual method in year for calculating directors NI (theresa challenge)

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Replying to rmillaree:
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By Adam12345
24th Mar 2022 14:02

If you put a salary of £992.33 in to your software for 2022/23 without any updates, it would calculate employees NIC being payable.

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Replying to Adam12345:
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By rmillaree
24th Mar 2022 14:19

"If you put a salary of £992.33 in to your software for 2022/23 without any updates, it would calculate employees NIC being payable."

Not up to 31/7/2022 it won't and surely thats all that matters.

Think about it if you put 4 lower amounts in and 8 higher amounts the NI will be broadly be the same with current software so having 4 and 8 doesnt serve any purpose.

In summary Payroll dates after 1/8/2022 should be ignored as they will be updated by update

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Replying to rmillaree:
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By bendybod
08th Apr 2022 14:33

I have at least one client who insists that I use the normal method. You can lead a horse to water....

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Replying to Adam12345:
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By Mr_awol
24th Mar 2022 12:58

Adam12345 wrote:

Nope. I thought this originally, but the draft legislation accounts for this.

The annual earnings limit for directors is £11,908.

Well i never didn't not know that.

Whilst I'd hope i (or more accurately my payroll department) would have spotted it, I've got to be honest and admit that it would probably have flagged up not from directors' payroll, but from Class 4 - I'd been wondering how/whether the Self employed would get a beneficial result compared to Employees.

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Replying to Adam12345:
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By PureAccountAnt
07th Apr 2022 09:04

I agree, £823 Apr-Jun, £1048 Jul-Mar.

In short, we (a profitable company with no employment allowance) should always pay Directors salaries up to the primary threshold, not the secondary threshold. This is because employers NI at 15.05% is less than CT at 19%.

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Replying to PureAccountAnt:
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By rmillaree
07th Apr 2022 09:47

"I agree, £823 Apr-Jun, £1048 Jul-Mar."

I have seen this recommendation repeated multiple times but cannot fathom why anyone would do this when £992 * 12 is much simpler - bizzare indeed unless i am the numpty here ? - i am presuming all acountants use directors method for calculating NI.

Can someone please explain why i am a numpty - cheers !!

Surely there is only one annual NI for directors - not two separtely calculated periods

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Replying to rmillaree:
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By lionofludesch
07th Apr 2022 10:20

rmillaree wrote:

"I agree, £823 Apr-Jun, £1048 Jul-Mar."

I have seen this recommendation repeated multiple times but cannot fathom why anyone would do this when £992 * 12 is much simpler - bizzare indeed unless i am the numpty here ? - i am presuming all acountants use directors method for calculating NI.

Can someone please explain why i am a numpty - cheers !!

Surely there is only one annual NI for directors - not two separtely calculated periods

Absolutely.

Some folk just don't get that.

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Replying to rmillaree:
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By PureAccountAnt
07th Apr 2022 11:38

It depends on your definition of "much simpler". It's extremely simply for me to update Directors pay in July.

Using the annual method, £992 x 12 is fine. It wouldn't work if the alternative method is used, of course.

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Replying to PureAccountAnt:
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By lionofludesch
07th Apr 2022 16:14

PureAccountAnt wrote:

Using the annual method, £992 x 12 is fine. It wouldn't work if the alternative method is used, of course.

Tha's a bit of a non-argument. You can switch from standard to alternative at any time. Including mid year.

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Replying to Duggimon:
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By pauld
24th Mar 2022 14:53

Does this take into company dividends that may or may not fall within the personal allowance and the new 8.75% rate?

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By rmillaree
24th Mar 2022 13:44

Ok presuming the copied post below the link is correct in the assumption made it seems straightforward that anyone wanting £11,908 level should be able to simply do 12 * 992.33 "ish"

Can't see any reason why anyone would do 3 or 4 at lower level and then 8 or 9 of another to catch up to same total when we can have 12 of one.

Please correct me if i am wrong

https://www.accountingweb.co.uk/any-answers/hip-hip-hooray-hip-hip-hooray
"The director's annual threshold for 2022/23 is definitely £11908 according to the information supplied to software developers."

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By clark.hall
25th Mar 2022 15:47

Savings of salary at NI PT £11,908 vs NI ST £9,100

Corp tax savings: £533 (£11,908 - £9,100) x 19%
Less: Cost of ers class 1: £422 (£11,908 - £9,100 x 15.05%

Saving £111 BUT with hassle of making PAYE payments.

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Replying to clark.hall:
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By clark.hall
26th Mar 2022 18:27

Correction the saving of a salary at £11,908 = £191 (I didn't give corp tax relief to the ers NI earlier).

The saving of a salary at PA £12,570 where Empt Allow is available look significant, an improvement on last year and shouldn't be dismissed too quickly.

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Replying to clark.hall:
All Paul Accountants in Leeds
By paulinleeds
28th Mar 2022 15:23

Don't forget that if more salary is received, more personal allowance is used, and therefore an extra 8.75% of dividend tax will then become due due on the personal allowance now used up on the extra salary.

That reduces the saving considerably!

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Replying to paulinleeds:
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By rmillaree
28th Mar 2022 16:37

"Don't forget that if more salary is received, more personal allowance is used, and therefore an extra 8.75% of dividend tax will then become due due on the personal allowance now used up on the extra salary.
That reduces the saving considerably!"

No it doesnt - as clearly evidenced by beebyengland's excellent calcs - the dividend tax difference betwen lower and higher salary is under £20 !!!!!

The reason for this is that if more salary is taken less dividends are taken so the loss of allowance mostly cancels out with there being less dividends that fit in the smaller unused allowance !

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Replying to paulinleeds:
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By clark.hall
29th Mar 2022 16:06

You're right @paulinleeds - the saving is reduced to £174 (extra divi tax of £17) on a salary of £11,908 the most tax efficient salary for most directors to whom EA is not available.

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Red Leader
By Red Leader
25th Mar 2022 15:55

I'll be using £757/month.

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By lionofludesch
25th Mar 2022 19:08

The answer depends on whether the secondary NI is covered by EA.

If no, it's the NI threshold. If yes, it's the tax threshold.

But there could be a few spanners in the works, such as marriage allowance.

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Replying to lionofludesch:
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By beebyengland
26th Mar 2022 11:25

im sure im missing something, but. If i run a hyperthetical set of accounts with 20k sales and 2 scenarios where the sole director take out 11,908 and 9,100.
1)
Sales 20,000.00
wages 11,908.00
ers NI 422.60
NP 7,669.40
C tax 1,457.19
Dividends left 6,212.21
Dividend tax 310.64
Total Income 17,809.57
Total tax 2,190.43
2) Sales 20,000.00
wages 9,100.00
ers NI -
NP 10,900.00
C Tax 2,071.00
Dividends left 8,829.00
Dividend tax 293.91
Total Income 17,635.09
Total tax 2,364.91

Paying 11,908 seems to be more beneficial by 174.48. Am i missing anything?
TIA
Im assuming i did a similar calculation to Duggimon and MCV71?

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Replying to beebyengland:
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By lionofludesch
26th Mar 2022 17:02

beebyengland wrote:

im sure im missing something, but. If i run a hyperthetical set of accounts with 20k sales and 2 scenarios where the sole director take out 11,908 and 9,100.
1)
Sales 20,000.00
wages 11,908.00
ers NI 422.60
NP 7,669.40
C tax 1,457.19
Dividends left 6,212.21
Dividend tax 310.64
Total Income 17,809.57
Total tax 2,190.43
2) Sales 20,000.00
wages 9,100.00
ers NI -
NP 10,900.00
C Tax 2,071.00
Dividends left 8,829.00
Dividend tax 293.91
Total Income 17,635.09
Total tax 2,364.91

Paying 11,908 seems to be more beneficial by 174.48. Am i missing anything?
TIA
Im assuming i did a similar calculation to Duggimon and MCV71?

Well, you're paying less dividend tax on a larger dividend, which might need reviewing.

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Replying to lionofludesch:
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By rmillaree
27th Mar 2022 10:44

"Well, you're paying less dividend tax on a larger dividend, which might need reviewing."

I have reviwed and dividend tax figures and they look fine to me - vageries of the tax calc is that higher dividends always doesnt mean higher dividend tax (as more pa is available in option 2)

ps cheers for putting up your calcs beebyengland - much more useful having quoted saving cross referenced to actual numbers rather than just posted without the matching proof of the pudding.

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Replying to lionofludesch:
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By andrew1211
30th Mar 2022 10:18

it's called using the PA

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By Andrew Lee
28th Mar 2022 10:06

The dividend tax on £8,829 should be £563.39, which increases the saving on the higher salary by another £269. I had also run some numbers of, coincidentally, a profit figure of £20k, but I made the saving £519, which I felt did possibly warrant paying some ER's N.I. in months 10 - 12 for 2022/23 and months 9 - 12 from 2023/24, but we will do a circular email to all clients that are possibly affected explaining the position and asking them to confirm if they want to make the change. I expect most of them will. This also affects multiple directors in companies that otherwise fully utilise the Employment Allowance, although that will have to be re-checked now as well.

Continuous changes at the tax margins mean we have to keep making these types of comparison for relatively small savings but, you know if don't, some clients will start to ask why their salaries haven't been changed when they find out about the difference from someone else etc. and then you might lose a client....

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Replying to Andrew Lee:
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By rmillaree
28th Mar 2022 10:38

"The dividend tax on £8,829 should be £563.39,"

How do you get that total? i get the same as beebyengland

salary 9100
pa 12570

dividends covered by pa 3470
dividends tax at 0% = 2000
dividends taxed at 8.75% on 3,359 = 293 as per beebyengland calc
total dividends 8829

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By Andrew Lee
28th Mar 2022 14:58

Because I am clearly an idiot!

Thanks for pointing out.

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By GDavidson
28th Mar 2022 16:39

Sheesh. Are any of the the solutions offered so far worth the effort? Do accountants know how short life is?

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Replying to GDavidson:
By JCresswellTax
28th Mar 2022 17:16

Do you know how fussy clients can be? Or are you happy to say to a client "sorry I didn't work that out as it didn't seem worth the minimal effort." Sheesh.

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Replying to JCresswellTax:
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By lionofludesch
28th Mar 2022 17:44

Aye - but while you can formulate some basic principles, the actual answer will need to be personally tailored to the client and his family.

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Replying to alisonis:
A Putey FACA
By Arthur Putey
30th Mar 2022 14:25

Thanks, that copies and pastes quite nicely into my newsletter (once corrected that is)!

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By Gone Sailing
12th Apr 2022 17:26

Pardon me for being naive (or thick) but when I heard "starting from July" I assumed it meant that July is when it would hit the payroll, and would be backdated to April.

Has HMRC really asked software companies to develop their software for a mid-year change in an NI rate?

I thought July 2022 was said just to get the new PT in and tested, after the software had already been set up at the lower amount from the Nov 2021 budget.

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Replying to Gone Sailing:
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By lionofludesch
12th Apr 2022 17:35

Gone Sailing wrote:

Pardon me for being naive (or thick) but when I heard "starting from July" I assumed it meant that July is when it would hit the payroll, and would be backdated to April.

Has HMRC really asked software companies to develop their software for a mid-year change in an NI rate?

Yes - why not ?

We did it when we only had paper tables and deduction cards. Should be a lot easier with computers.

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Replying to lionofludesch:
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By Gone Sailing
12th Apr 2022 17:44

Ta, just seen this debate on the softaware:
https://www.accountingweb.co.uk/any-answers/hip-hip-hooray-hip-hip-hooray

Interesting though, if the early software was built to replicate the old tables, all good, but if recent developers took the short cut that the PT (&ST) would not change mid year, hmmm.

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Replying to Gone Sailing:
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By rmillaree
12th Apr 2022 17:55

Well thankfully all sorted for moneysoift users - new rates already uploaded ready for July

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Replying to Gone Sailing:
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By lionofludesch
12th Apr 2022 17:57

Gone Sailing wrote:

Interesting though, if the early software was built to replicate the old tables, all good, but if recent developers took the short cut that the PT (&ST) would not change mid year, hmmm.

Then they'd need to go back and take the long way round.

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By Gone Sailing
25th Apr 2022 15:36

For those of us averse to chasing up whether PAYE has been paid (presumably quarterly) why not 11 @ £758 and 1 @ £3,570, the latter being in March 2023, with the PAYE reminder, reminder of the justification, the P60 and the payment reference.

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Replying to Gone Sailing:
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By Matrix
25th Apr 2022 20:20

Good idea. I will see how I am feeling in March 23. I went with £758.

Advising clients to pay PAYE who have never paid it before and adjusting their pay using journals since they didn’t take the correct salary would result in more work.

How much do you think they save by taking the higher amount?

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