Setting an optimal salary for a company director each tax year is the most common form of tax planning. We always suggest setting a salary first then paying a combination of dividend, interest and rent to take money from your company. The important thing to remember is everyone’s tax affairs are unique. We recommend discussing your tax affairs with an accountant before taking any action.
The new optimal salary is £719 per month or £8,628 per annum. This falls within the tax-free personal allowance and is a tax-deductible expense against your company profits.
This level of salary will also provide you with a full National Insurance Contribution towards your state pension and other state benefits, even though you have not actually paid any National Insurance.
If you have a second director or employee on your company’s payroll, your company can claim the Employment Allowance so that you don’t have to pay the first £3,000 of employers National Insurance. When this is the case, it is better for you to increase your director’s salary(s) to £1,041 per month or £12,500 per annum, to match your tax-free personal allowance.
You’ll have to pay some employees National Insurance – 12% on earnings between £8,629 and £12,500. However, this is lower than the 19% Corporation tax your company will pay if you don’t take the extra salary and leave theses profits to be taxed inside your company.
If your company doesn’t qualify for an employment allowance, you will have to pay employers National Insurance at 13.8% on any earnings over £719 per month or £8,628 per annum. When added to the 12% employees National Insurance, your company and you will be paying a total of 25.8% in National Insurance Contributions. When this happens, the best option is to cap your salary at £8,628 per annum and switch to receiving a company dividend. Your company will have to pay 19% Corporation Tax on its profits before it can make a dividend payment, but it’s still a cheaper option than paying employers and employees National Insurance.
If you have benefited from the Marriage Allowance transfer and your company qualifies for the Employment Allowance your optimum salary for tax efficacy is increased by 10% to £1,145 per month or £13,750 per annum.