Director's Salaries & Dividends What's my director's salary for 2017-18?
When operating through a Corporate Entity there is always the question of what is the rate at which I should pay myself as a Director/Shareholder of the business so as to minimise my tax and N I costs.
What's the magic number?/p>
Last year, 2016-17, it was £671 or £916, but what
are the magic numbers going to be this year?
What should you take for 2017-18 and why take a
director's salary at all?
Let's find out!
Let£s start at the beginning. Why take a director's
salary at all? There a a couple of good reasons to take some of your income as salary from your limited
company
if
you don't have any other employment.
Reason 1. From a company perspective, wages and
salaries are expenses that reduce the taxable profit of the
company so save
on Corporation tax.
Reason 2. From a personal tax perspective, you
want to make best use of your personal allowance
. This is the amount that you can earn before you
have to pay income tax.
But why are there two magic number figures?
It all there's a difference between the level that
you start to pay income tax and the level that you start to pay
National Insurance.
This year (2017-18) the personal allowance is £11,500
, which means you can have
£11,500 of income without paying any income tax. This gives £958 per
month, the first magic number for 2017-18.
But, there is a catch. You might not pay income tax
but there will still be National Insurance to pay.
The National Insurance threshold is significantly
lower than the personal allowance figure, £8,164 for Class 1 NIC
compared to the £11,500
personal allowance, a difference of over £3,000.
If you are employed you pay Class 1 National
Insurance at 12%, when your income is above £157 per week or £8,164 per year.
In addition, there may also be the requirement for the company to pay the
Employer's Contribution at 13.8%.
This difference means that if you took your full
personal allowance there would be a Class 1 National Insurance bill across the
year of £400 Employees NIC and potentially £460 in Employers NIC; £860 in
total.
But there is some good news.
If you have a salary that falls between £113 per
week and £157 (for 2017-18) then you will get your National Insurance credits
towards your pension and other benefits, but the salary won't be high enough
for any National Insurance payments to be due.
This is the option many directors choose and making
the most of this limit for 2017-18 gives a monthly salary of £680 .
The second magic number.
It all comes down to a decision on whether to take
the full tax-free personal allowance amount or just go up to the National
Insurance threshold.
So, why would anyone bother claiming the full
£11,500?
If you have other employees, then you can claim
the Employment Allowance
which means that you don't
pay the first £3,000 of the Employer's National Insurance contributions. This
bring the National Insurance to just the 12% for the Employee contributions.
Corporation tax is paid at 20% so although you are
paying 12% National Insurance you are saving 20% Corporation tax at the same
time, a saving overall of 8%.
Confused yet? [Not at all surprised if you were!
OK, can we see how this works in
practice.
All of these are based on a company director who
has no income other than the company salary and dividends.
If you do have other employment, property income or
significant investment income then you should definitely speak to your
accountant about your particular situation, that can of course be us!
Example 1 - National Insurance threshold
If you just took a salary of £680 per month, the NIC threshold magic number,
you would pay no income tax and no National Insurance on that amount. You would
save 20% Corporation tax on your salary expense giving a £1,632 tax saving
overall.
Example 2 - Personal Allowance threshold with other
employees on payroll
If you have other employees and took a salary of £958 per month, the personal
allowance magic number, you would pay no tax but there would be Employee
National Insurance to pay of £400. There would be no Employers National
Insurance because you could claim the Employment Allowance. Your yearly salary
expense would save £2,300 in Corporation tax. However, this is offset by the
£400 due in National Insurance, giving an overall tax saving of £1,900. This is
higher than in example 1.
Example 3 - Personal Allowance threshold - no other
employees
If you don't have any other employees and took a salary of £958 per month, you
would pay not tax but would again have to pay the £400 Employee National
Insurance contribution. In addition there would be £460 in Employers National
Insurance contributions but you would not be eligible for the Employment
Allowance. The combination of salary and Employer's NIC expenses would save
£2,392 in Corporation tax but this would be offset by the £860 paid out for NIC
giving an overall saving of £1,532. This is the lowest saving of the three
examples.
Now you need to identify which of the above
examples gives you the best advantage.
If you don't have any other employees ,
you are best off sticking at £680 per month. At this level you
don't have to make any monthly PAYE payments to HMRC so there is also less
administration.
If you do have other employees then
in terms of tax you are better off claiming the full personal allowance
at £958 per month, particularly if you are having to make a
monthly PAYE payment to HMRC anyway.
Of course this is just the basic salary situation
and doesn't take into account other income or recent changes to tax on interest
and dividends.
Everyone is different, so it's always worth a
tax-planning conversation with us, now or preferably once we all know what the
parameters are going to be in each tax year, to confirm your particular
situation and help you make the most of the options that are available to you.
So what have you decided? What will your magic
number be?