We’re still meeting company directors who haven’t been advised on the most tax efficient way to remunerate themselves from their own limited companies.
Some think they have to pay themselves the National Minimum Wage (directors don’t unless they have an employment contract; they are office holders under the Companies Act and not employees). Others pay themselves a commercial salary as if they were a third party employee. This is almost always tax inefficient!
If you’re the shareholder and director or Company Secretary of your own limited company, then you should pay yourself a small director salary and take the rest of your income out of the company’s post-tax profits as dividends.
The director’s salary has historically been just enough to maintain their National Insurance Contributions record, without being enough to trigger an Income Tax or National Insurance liability. They’ve then been able to take dividends up to the higher rate tax threshold before triggering any personal tax liability.
As in 2014/2015, the £2,000 Employer’s National Insurance means that directors with no other employees can pay themselves up to the personal allowance of £10,600 and only incur a small National Insurance charge (if you have other income, your circumstances will differ).
Increase in your personal allowance
The personal allowance will be increasing to £10,600. This is much higher than the Lower Earnings Limit for National Insurance purposes, which is where these salaries have previously been pegged.
Rather than waste that extra personal allowance, it makes sense to take the £10,600 as salary in the year-ended 5 April 2016, have your company save £2,120 in Corporation Tax due to that salary, and pay a small amount of National Insurance through PAYE.
What should be your director salary?
Most people with no other income apart from their salary and dividends would have been advised to draw £641 a month in 2013/2014. This goes up from 6 April to £883.33 a month.
Remember, that’s your gross salary, not the net. You’ll take home a little less.
Assuming you have the standard PAYE code for the year, your company will pay you a net amount of £857.97 a month.
It will also have to pay HMRC £25.36 of Class 1 National Insurance a month (this can be paid quarterly).
Provided you don’t have other employees paid enough to trigger an Employer’s National Insurance Contribution, then the £28.61of Employer’s NICs that would have been due every month, will be exempted from payment by the £2,000 Employment Allowance.
Keeping HMRC informed
All salary payments would need to be processed through the company’s PAYE scheme and HMRC informed with a Real Time Information Return when each payment is made.
If you want the stress of running your monthly payroll taken away from you, then we can help.
Everybody’s circumstances are different. If you have other income sources or are a higher rate taxpayer, then get in touch to find the remuneration strategy that’s right for you.