TTR Barnes

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.  Dividends do not carry the same tax benefits as they have done historically and a careful balance between the use of salary and dividends should be considered.

Dividends vs. Salary

Directors of limited companies have traditionally taken a lower salary and supplemented this with dividends, which has been a tax efficient approach that does not attract National Insurance Contributions (NICs) to the dividend element of income and can be flexible based on needs.  A typical director pay make-up might therefore look as follows:

• Salary for the director sits below the personal allowance threshold, meaning that personal tax liabilities are not incurred.
• These director wages are then classed as a tax-deductible expense, giving tax efficiencies for the business itself
• The director salary sits at a level where it meets the threshold for national insurance purposes, giving the director access to state benefits and pensions further down the line.
• 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.

Dividend tax benefits have changed over recent years.  Although they still offer a tax-efficient way of providing income, their use should be carefully balanced with that of a salary to ensure best efficiency.
 

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

 
If your business qualifies for Employment Allowance, which currently negates the first £3,000 of Employer National Insurance Contributions, then it may be beneficial to utilise a higher director salary in order to make most benefit of this allowance. There are individual considerations and restrictions to take into account when using this approach however.  It is not possible to claim when:

• More than 50% of the work that your business/public body does is within the public sector and you are not classed as a charity
• Someone you hire is for any domestic, household or personal duties, unless they class as a carer/support worker
• As the director, you class as the only paid employee in the business
• 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.