The optimum directors salary 2019/20 will be £8,632 per annum which equates to £719 a month or £166 a week. This is the most tax efficient amount for the majority of directors to pay themselves.
Owner managed businesses can typically decide how to pay themselves. This can be either a salary, dividends or a mixture of them both. Directors which have no other income should look to pay themselves the optimum directors salary of £8,632. Any additional income should be paid as dividends.
Why is £8,632 the optimum directors salary 2019/20?
The optimum directors salary 2019/20 is £8,632 per annum. The reason for this is all down to the National insurance (NI) rates.
The lower earnings limit for NI in 2019/20 is £6,136 per annum. If you earn above this amount it will count as a qualifying year for your future state pension.
The primary earnings limit for NI in 2019/20 is £8,632 per annum. If your annual salary exceeds this amount you will need to pay NI contributions.
Therefore paying up to the primary threshold of £8,632 but not a penny more, means the taxpayer qualifies for the state pension but does not need to pay any contributions. Yes, you have read this correctly! You can qualify for a state pension without making any NI contributions.
Why not pay £nil salary?
A company can pay a Director (who is also a shareholder) through either salaries or dividends.
A salary paid is a tax deductible expense. The company can deduct tax at 19% which is the current company tax rate.
A dividend paid is not a tax deductible expense for the company.
Therefore paying a salary of £8,632 to the Director saves corporation tax of £1,640. There is no such saving if dividends are paid.
Also by paying a salary of £8,632 you are ensuring another qualifying year for the state pension is added.
When is a £nil salary advisable?
The optimum directors salary 2019/20 is only £8,632 per annum if the director has tax allowances available.
In situations where the director has other income such as pension income, another salary, rental income it may be advisable to pay a £nil salary. Also, if the individual is already at pension age and it is no longer important to have another qualifying year.
Under these circumstances it is important to seek specialist tax advice, which we can offer. Getting the figures wrong may cost you thousands in extra taxes.
Why not pay higher salaries?
All taxpayers have personal allowances in which they can earn income tax free. As soon as these allowances are used up tax rates are applied.
When income exceeds £8,632 per annum, NI taxes are applied. Also when the income exceeds £12,500 income taxes are applied.
The NI tax and income tax rates combined are significantly higher than the dividend tax rate. Even when accounting for the corporation tax reduction on the salaries, paying dividends is still more tax efficient.
When to pay more than the optimum directors salary 2019/20
In some certain circumstances it may be advisable to pay in excess of the optimum directors salary 2019/20.
Should the director have a contract of service they must legally be paid the national minimum hourly wage. This would typically be higher than the £8,632 per annum.
Dividends can only be paid out if the company has profit and loss reserves. If the company has made losses in the past it may not be possible to pay dividends. Higher salaries may be the only option.
Optimum directors salary 2019/20 with dividends
When income exceeds £8,632 dividends are more tax efficient than additional salaries. This is because the dividend tax rates are lower than PAYE & NI tax rates.
Clearly an annual salary of £8,632 per annum is not high enough for most individuals to live off. The additional income is then paid to the Director as dividends. We are assuming the Director is also a shareholder.
After paying a salary of £8,632, the first £5,868 worth of dividends are tax free. (Calculation: Personal allowance of £12,500 less salary of £8,632 plus the dividend allowance of £2,000).
The Director has therefore now earned £14,500 all of which is completely tax free.
The next £35,500 of dividends are taxed at 7.5%. This takes us up to the top level of basic rate which is £50,000 for 2019/20.
Dividend tax rates for higher rate taxpayers are taxed at 32.5% and for additional rate taxpayers it is 38.1%.
Conclusion – optimum directors salary 2019/20
The majority of owner managed businesses should pay themselves a salary of £8,632. We then recommend paying dividends of up to £41,368. This takes the total income up to £50,000 which is before higher rate taxes kick in.
With this level of income the company saves corporation tax of £1,640.
The Director will need to pay personal taxes on the dividend income of £2,662. This is an effective tax rate on the £50,000 income of just over 5%.
There are numerous assumptions made when concluding the above figures. The amounts are therefore not suitable for all directors. To calculate your optimum directors salary 2019/20 you must look into your individual circumstances. Contact a chartered accountant today on 07961048484 and ensure your tax position is optimised.
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