Such a simply question can produce a complicated answer, but for this calculation, we have assumed the following:
- The director wants to preserves their entitlement to state benefits, and
- The director wants a salary which saves the most tax and national insurance.
First of all let us look at preserving your entailment to state benefits. To preserve your entitlement to a full state pension you currently need 30 qualifying years. In 2014/15 you will need to have at least £5,772 of earnings (going through a PAYE scheme) for it to be a qualifying year. Paying yourself this amount also means neither you nor your company, would have any tax or national insurance to pay.
So you’re now thinking I will just pay myself £5,772, right? Wrong.
Now let us think about the second point.
If you paid yourself £5,772, you save yourself and your company on paying tax and national insurance, but you’re wasting £4,278 of your personal allowance.
Now, with the introduction of the Employment Allowance which could mean that the first £2,000 of your national insurance (Class 1) bill is reimbursed to you.
If you are a qualifying employer (for the Employment Allowance), the optimum salary is £10,000 per year (£833.33 per month), this will cost you just over £245 in personal national insurance and £282.07 in company national insurance, but this will be reimbursed under the Employment Allowance scheme, but you will save over £845 in corporation tax. If you are not a qualifying employer the optimum salary is £7,956 per year (£663 per month).
Notes:
The PAYE thresholds, rates and allowances (used in our calculations) for 2014/15 :
- Your annual personal allowance is £10,000 per annum
- Lower earnings Limits is £5,772 per annum (£111 per week or £481 per month)
- Primary and secondary threshold is £7,956 per annum
- Employees’ class 1 rate 12% (Between the primary and upper earnings limits)
- Employers’ class 1A rate 13.8% (first £2,000 is reimbursed, if employer is qualifying)
- Corporation tax saving (£10,000-£5,772 = £4,228 x 20%)
- If you wanted to avoid national insurance on your salary altogether you would have to pay yourself less than £7,956 and you would also waste £2,044 of your personal allowance, which your company would have to pay £408.80 in corporation tax. So overall your company would be £163.52 worse off.
More about the basic state pension can be found here: https://www.gov.uk/state-pension/eligibility
More information about National Insurance, Income Tax rates and allowance or Employment Allowance can be found on HMRC’s website
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The information provided in this blog and all our blogs is of a general nature. It is not a substitute for specific advice in your own circumstances. This information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting detailed legislation or seeking professional advice.