Deciding the amount of salary to pay yourself as the Director of a Limited Company involves some careful tax planning. There are lots of variables to consider and everyone’s circumstances are different. Here, we attempt to explain these considerations.
Your salary is deductible as an expense to the company, so we want to take it as high as we can to save you some corporation tax, whilst ensuring those savings outweigh the cost to you of personal tax and NI.
For the purposes of this article, we are looking at the 21/22 tax year, and the rates and allowances mentioned are applicable to that year.
If you have salary or income earned from anywhere else during the tax year, then you should take this into account when working out your allowances.
There are THREE MAIN elements in play:
An employer (your company) pays 13.8% employer’s NICs on wages over £8,840 per year.
There is currently an “Employment Allowance” (EA) in place, which means that you can reclaim up to £4k of employer’s NICs per annum. This can only be claimed if there is more than one employee, so if you are a sole director with no other employees then you cannot claim this.
If you cannot claim EA, then £8,840 is a tax efficient salary, with no NIC or income tax due.
The personal allowance is the number most people know, but it only applies to tax. You also have to pay 12% NI on anything over £9,568 per annum.
If you cannot claim the Employment Allowance, then £9,568 is usually the MOST tax efficient salary. However, it does mean that you need to pay over a small amount of NI to HMRC as it arises, and there will be additional administration involved. You should consider whether the additional administration outweighs the savings. Indeed, if you miss one payment you could incur a £100 penalty, and this would immediately cancel out any savings you had made, so choose this option with caution, and only if you are organised!
You can earn £12,570 per annum without paying any tax, since this is the current personal allowance. This is usually the most tax efficient salary to pay yourself if you ARE eligible for the EA. However, if some or all of this has been used up on other employees, then this does not apply.
By Michelle Accounticorn Morris on 16/03/2021 12:00:00