Directors can save £1,600 in corporation tax by paying a tax efficient directors salary. The optimum salary incurs no additional personal income tax or national insurance.
Every year the tax allowances change. So every year the optimum directors salary changes and this is no different in April 2018.
From 6th April 2018 the directors salary that we are recommending to our clients is £702 a month or £162 a week.
Directors salary for 2018/19 tax year – Company taxes
Paying any salaries to employees or directors is a tax deductible expense and will save your company corporation tax at 19% which is the current corporation tax rate. Therefore the higher the salaries the higher the corporation tax savings.
However companies also have to pay employers national insurance on directors salaries. Employers national insurance is paid at 13.8% on earnings above £162 a week which equates to £8,424 per annum.
An annual salary of £8,424 paid to a director would save corporation tax of £1,600 a year and incur no employers national insurance liabilities.
As a director we are assuming for these illustration purposes that there is no contract of service. Therefore the usual national minimum hourly wage and pension auto enrolment legislation does not apply.
Directors salary for 2018/19 tax year – Personal taxes
The personal allowance for UK individuals is £11,850 in the tax year 2018/19.
Employees national insurance is paid on earnings over £162 a week. This is the same threshold as above so this again equates to a directors salary of £8,424 per annum.
An annual salary of £8,424 paid to a director is below both the personal allowance and employee national insurance rates. Therefore no additional personal taxes are payable.
Directors salary with dividends for 2018/19 tax year
Paying a directors salary of only £8,424 is the most tax efficient for the Limited company and for the director.
However a salary of only £8,424 would generally not be adequate enough for most individuals living expenses and therefore the directors income can be increased by paying them dividends.
To pay a director a dividend they must own shares within the business. This is generally the case for businesses which we act as accountants for.
Dividends are taxable to the individual so a director receiving dividends may need to pay personal tax. They are however taxed at a lower rate than employment income.
Typically dividends for a basic rate taxpayer are taxed at a rate of 7.5%. This is much lower than the employment rate which would be 20% personal tax and national insurance of 12%. From April 2018 the first £2,000 of dividends are tax free.
Directors salary with pension income for 2018/19 tax year
Paying a directors salary of £8,424 is only tax efficient because it is below the personal allowance of £11,850.
If a director was in receipt of other income such as a second employment, pension income or other income then the personal allowance of £11,850 could easily be exceeded.
Additional secondary income exceeding £3,426 would mean that the directors salary would be taxed at 20%.
Therefore this may no longer be the most tax efficient directors remuneration strategy.
Directors salary and qualifying year for state pension
Does a directors Salary of just £8,424 per annum qualify for state pension relief?
Most people know that you need to have worked for so many years to qualify for the full state pension. This amount varies depending on your age but it is typically around 30 years of employment.
With a directors salary of £8,424 per annum neither you nor the company pay any national insurance contributions so you may be surprised to learn that even this low salary still qualifies.
To have a qualifying year for pension relief you need to earn above the lower earnings threshold for national insurance which in the 2018/19 tax year is £116 per week or £503 a month.
Our tax efficient directors salary recommendation of £702 exceeds this amount and therefore qualifies.
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