£8,632 is the optimum directors’ salary for 2019/20

26th November 2019

Working out the most tax-efficient salary to pay your company directors should be key consideration for business owners. In our guide to the optimum directors’ salary 2019/20, we’ve broken down the things you need to consider when calculating how much to pay your directors.

directors salary

The traditional approach

Taking a low basic salary with the balance of income being paid as dividends has been a common approach for directors and business owners of limited companies. It gives good tax efficiency, both for the business and the individual director, and is based on the following common practice:

  • The director takes a low salary, no higher than the personal allowance. This means that it does not attract personal tax.
  • The salary is set high enough for national insurance purposes i.e. that it counts as a years ‘stamp’ for national insurance history. This helps to protect future entitlement to state pension and benefits.
  • The salary is a tax-deductible expense for the business. This means that corporation tax is saved at 20% on the gross salary.
  • Further income is paid as dividends, which do not attract national insurance and, therefore, mean the director is not paying any more NIC contributions than they need to.

However, changes to the mean that the tax benefits of income paid through dividends have decreased. Dividends can certainly still offer tax-efficient income, depending on individual circumstances, but increased consideration should be given to ensuring efficient salary payments for directors.

Limited company directors

Limited company directors have more flexibility in how they pay themselves.

Assuming you are working outside of IR35, most limited company contractors extract income in the form of dividends, and a small salary. The main tax benefit of incorporating is that dividends are not subject to National Insurance Contributions (NICs), whereas salaried income is.

What is the optimum directors’ salary for 2019/20?

An efficient director salary aims to stay between two National Insurance thresholds:

  • The Lower Earnings Limit – The aim is to sit above this. If you earn above this limit then you have protected your entitlement to future state pension and benefits, but without necessarily paying any National Insurance.
  • The Primary Threshold – The aim is to sit below this. If you earn above this you have to start paying National Insurance.

So, the objective of efficient director salaries is to pay above the Lower Earnings Limit but to remain below the Primary Threshold.

For 2019/20, your options are:

  1. £8,632 salary – if you are entitled to the full personal allowance (£12,500 for 2019/20) then you will not have to pay any tax at all if your income doesn’t exceed this and you will only need to pay Employees’ and Employers’ NICs once your salary reaches £8.632. This means that if your company is not claiming Employment Allowance (see below for more guidance on EA) then £8,632 is the optimum directors salary for 2019/20.
  2. £12,500 salary (claiming Employment Allowance) – if you are eligible for EA, working outside of IR35 and not the sole director/employee of your company earning over the Secondary Threshold then it is more tax-efficient to pay yourself a higher salary and claim EA.

Employment allowance

It is possible that your company is entitled to the Employment Allowance. Introduced in 2014, the Allowance covers the first £3,000 of Employer National Insurance contributions which need to be paid within the tax year. In some cases, it may be that it is more efficient to pay a slightly higher director salary until such point as the NIC Employment Allowance has been utilised. However, this is very much dependent on circumstances of both the company and the individual and there are specific restrictions on when it may apply. For example, you can’t claim if:

  • You’re the director and only paid employee in your company
  • You employ someone for personal, household or domestic work (e.g. a nanny or gardener) – unless they’re a care or support worker
  • You’re a public body or business doing more than half your work in the public sector (e.g. local councils and NHS services) – unless you’re a charity
  • You’re a service company with only deemed payments of employment income under ‘IR35 rules’ – remember that from April 2020 HMRC is making changes to IR35. Read our guide to understand what this will mean for your business

Talk to the experts

If you would like information about efficient income management, or any other tax issue, please do not hesitate to get in touch with our friendly team of tax experts.

Chartered Accountants in Sunderland, offering expertise on everything from Tax and Business Planning,
to Accounts and VAT.