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. This demonstration is on the basis that you have no other qualifying earnings to report in the period.
There is a chance that further measures announced at the end of the month as part of the Government's Spring Statement, may affect recommendations and projections in this note. If this is the case, the note will be reissued.
The Context
You may have noticed from the Autumn Statement delivered in October, that changes to Employers NI and the Employers Allowance are due to take affect from the start of the new tax year.
The rate of Employers NI will increase from 13.8% to 15%. The point at which Employers NI becomes due (known as the secondary threshold) will reduce from £9,100 to £5,000. A double whammy.
The Employers allowance, which is a reimbursement at source of Employers NI, available to small businesses that have people other than a sole director on the payroll, will increase from £5,000 to £10,500.
For Companies with single directors who wish to continue to pay themselves a salary and accrue NI qualifying years, I'm afraid this will mean an increase in your Employers NI liabilities for the 25-26 tax year.
Recommendation
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 (to ensure an NI qualifying year) but at the level of the Personal allowance (the income tax free threshold) and Primary threshold (the employee NI tax free threshold).
However, the amount exceeds the point (£5,000) at which employers NI contributions (the secondary threshold) of 15% begin to accumulate.
For those eligible for the Employers Allowance, the first £10,500 of employers NI due on your team’s salaries will be reimbursed at source, which will mean no employers NI will be due at all for the majority of you.
For those not eligible for the Employers Allowance, mainly sole directors, the employers NI bill on your salary will be £1,135.50. The liability in 24-25 on the same salary was £478.86.
Remember though, salary and employer NI payments are an allowable expense for corporation tax. With the rates of corporation tax being anything between 19% and 25%, you can see that the CT saving is greater than the Employers NI expense.
I’ve attached some of my sums at the bottom if you’re interested.
Other options
If you really don't want to pay any Employers NI then you would set your salary at £5,000 (the secondary threshold). This is less tax efficient overall, and will not contribute a full NI qualifying year due to the amount being beneath the lower earnings limit of £6,500.
So I would recommend this amount only to those that have a real beef with PAYE tax, and are prepared to sacrifice cash in their pocket and their state pension for the cause.
You could of course 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 programs.
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.
Or you can pay yourself 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 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 child 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 table below shows a range of withdrawals amounts split by salary and dividends, and what that would mean for you from a dividend tax perspective.
One final point to note. Dividend tax is a personal (not company) liability. Therefore, if you opt to pay your personal tax bill from your company, then this amount will be added to your director loan account, and an additional dividend would be needed in order to clear it.
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 £12,570 (or £1,047.50 per month) in salary and £22,430 (or £1,869.17 per month) 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.
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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