If you are a director of your own company the chances are that in the past you have been remunerating yourself by paying a low or no salary and extracting the balance of income by dividends. Due to well publicised and well documented changes in dividend taxation and also a change in National Insurance, single director companies need to reconsider the benefits of trading via a company. There is still some tax benefit whatever the level of profits but it is not as clear cut as it used to be and there might be other factors which make it not worthwhile. However, if this is the choice that has been made, what is the best director salary to pay?
What to pay yourself as a director
An important change that has taken place this year is that the employer’s allowance is now £3,000 (which was previously £2,000 per annum) but will not be available to single employee companies i.e. targeting single director companies and this has changed the landscape. In the past if you had other income to use up your personal allowance you might not have paid yourself any salary at all and extracted everything by dividends. However, the changes to dividend taxation means that it is better to pay yourself some salary whatever other income you might have. Directors should either pay themselves just below what is known as the primary threshold of £155 per week, say £8,008 per annum to ensure that there is no National Insurance payable by either the company or the director whilst at the same ensuring that a credit is received on their personal National Insurance records. This will reduce the amount of dividend paid and therefore the impact of dividend taxation. So long as the director has a full personal allowance through the PAYE code, this also means that there will be no deductions made from his or her pay which will keep everything relatively straightforward. If on the other hand the company can justify taking on another employee and therefore the employer’s allowance is available, the director should consider paying themselves a salary equal to the full personal allowance depending upon what other income they might have. If you would like some help deciding what salary to set for yourself in your limited company, please contact us.