It is nearing the end of April which means one thing – payroll. One popular question this time of year is:
“What is the most tax efficient salary for a company director this year?”
If for the 2015/16 tax year you pay yourself a salary of £8,060 (£155 per week) you will pay no tax and no national insurance. This is also the level at which you are still counted as preserving your national insurance record.
However the most tax effective salary is £10,600.
£10,600 is your personal allowance for 2015/16 which means you can earn this amount during the tax year without having to pay any income tax.
Because it is above the national insurance threshold you will be liable to pay employees national insurance of £304.60 and employers national insurance of £343.34
The employers national insurance amount of £343.34 is covered by the £2,000 “Employment Allowance” (see below) which means you would only have to pay employees national insurance contributions of £304.60.
By paying yourself a salary of £10,600 you will save yourself £508 more in corporation tax than by paying yourself £8,060.
£10,600 – £8060 = £2,540
£2,540 at 20% (corporation tax rate) is £508.
The £508 offsets the £304.60 you pay in national insurance which means that by paying yourself £10,600 you save £203.40 in tax compared to paying yourself £8,060.
Other Points To Consider
Whilst the above salary is the most tax effective it won’t necessarily apply to everyone. There are a number of elements to consider when determining your salary level for 2015/16:
1) The “Employment Allowance” which came into effect in April 2014 has been extended for this tax year which means that you can reclaim up to £2,000 back from HMRC for employers national insurance costs.
2) Your personal allowance decreases by £1 for every £2 you earn over £100,000. This means that is you earn over £121,200 you will have eliminated all of your personal allowance.
3) If you are planning on taking a small salary with the remainder of your income paid via dividends then you need to ensure that your company has sufficient reserves to pay the dividends. If your company declares a dividend with negative reserves this makes the dividend illegal and as a Director you could be made to repay the illegal amount of the dividend back to the company.
4) If you have a signed employment contract with the Company then you must pay yourself at least the minimum wage, which if you are over 21 is £6.50 per hour. If you are paying yourself the recommended salary of £10,600 and have an employment contract you will be in breach of the minimum wage rules.
If you are in any doubt about the best way to structure your salary for the year make sure you talk it through with your accountant.