It’s that time of year to have a think about optimum salaries for You as Company Directors, and potentially your family members who may be on the payroll, for the upcoming tax year.
Below are salary recommendations and projected personal tax liabilities based on varying levels of aggregate withdrawals, including dividends. Be advised, this recommendation is on the basis that you have no other qualifying earnings to report in the period.
Option 1 – Personal allowance
This recommendation is based on 1) optimal tax efficiency, and 2) ensuring a qualifying record for your statutory benefits, including state pensions.
My recommendation based on these criteria would be for you to pay yourself a salary of £12,570 for the year, or £1,047.50 per month. This figure is above the National Insurance lower earnings limit but at the level of the personal allowance.
The amount exceeds the point (£9,100) at which employers NI contributions (the secondary threshold) of 13.8% begin to accumulate. However, your corporation tax saving on the additional salary of at least 19% exceeds this giving a net tax saving. Your company may also be entitled to the employers allowance (a rebate of employers NI up to £5,000) which will further increase the tax saving.
Option 2 – Secondary threshold
This salary recommendation is slightly less tax efficient. However it eliminates the need to make PAYE payments (less administrative burden) and still ensures a qualifying year for your statutory benefits, including state pensions.
This would generally be useful for single director companies who do not benefit from the employers allowance, or proprietors looking for a simpler arrangement.
This would involve a salary of £9,100 for the year, or £758.33 per month.
The amount of £9,100 (the secondary threshold) is below the point at which employers NI contributions of 13.8% begin to accumulate. You will be making a corporation tax saving on the salary of at least 19%, but not as much as you would have had the larger salary been paid.
Option 3 – Set your own
You can set your own salary.
Tax or administrative efficiency may not be the only considerations for deriving your personal earnings.
Some prefer to maximise take home pay and serve the greater good through personal choice. Others prefer to channel their contributions through the tax system and public spending programmes.
Whilst her motives are unclear, Denise Coates CBE, founder of Bet 365, famously calibrates her extraordinary earnings much more in favour of salary than dividends.
Option 4 – No salary
No salary at all.
If you have earnings elsewhere (employment earnings etc), that will be subject to income tax and NI, either at source or via PAYE, then there may not be a case for you not to draw a salary at all from your Company.
If this is the case, and you’d like to talk this through please let me know.
Total withdrawals
I recommend that any further withdrawals are taken as dividends. Remember, dividends are traditionally a discretionary distribution of Company profits, and in large organisations are declared bi-annually or quarterly. Therefore, I would advise against multiple, ad hoc payments of varying amounts through the year as this isn’t congruent with the substance of dividend payments.
Instead, pay considered amounts at regular intervals (supported by a dividend voucher) and certainly no more than 12-15 times in the period.
You may wish to put together both a Company and Personal budget for the year ahead taking into account the sources and level of income and expenditure. If you are a client benefit claimant, you should also consider the high income child benefit charge which becomes due when earnings exceed £60,000.
You can then arrive at a total withdrawal figure which considers your Company’s trading performance and your own personal circumstances. Remembering of course to set aside a sufficient amount for tax due.
The Dividend figure would be simply the total you wish to withdraw from the Company minus the amount we agree as your salary.
The link below shows a range of withdrawals amounts split by salary and dividends, and what that would mean for you from a dividend tax perspective, across the 4 options above.
Example
Having done your budgets, you reckon an annual withdrawal amount of £35,000 (highlighted in orange) would be affordable for your Company and suitable for your personal needs. Looking at the table attached, an annual withdrawal amount of £35,000 means that through the year you would draw:
for option 1, £12,570 (£1,047.50pm) in salary and £22,430 (£1,869.17pm) in dividends, and
for option 2, £9,100 (£758.33pm) in salary and £25,900 (£1,869.17pm) in dividends
Dividend Tax due would be £1,918.88 in personal tax payable by you, meaning you should set aside roughly £160 per month for your self-assessment. Remember, you would pay less tax overall in option 1 because of the extra corporation tax saving that would come about with the higher salary, even in spite of a potential Employers NI bill.
A withdrawal amount of £13,070 (highlighted in blue) is the point at which basic rate (8.75%) dividend tax kicks in (i.e. after the personal allowance and dividend allowance is used up)
A withdrawal amount of £50,270 (highlighted in green) is the point at which higher rate (33.75%) dividend tax kicks in (i.e. after the personal allowance, dividend allowance and remaining basic rate threshold is used up). Note the steeper growth in tax liabilities beyond this threshold.
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