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Optimal Salary and Dividend Strategy 2014/15

2014/15 tax year upon us are extra options to consider in relation to extracting the optimal mix of salary and dividends from your company.

Traditional Planning

As a director and shareholder of your own company you can decide how much salary to pay yourself each month in order to use your tax free personal allowance in the most tax efficient way. Any further funds you need can be extracted as a dividend if the company is making a profit and has distributable reserves.

If you are a director of your company and you do not have a contract that sets out terms of employment with the company, you do not have to pay yourself the National Minimum Wage. So how much should you pay yourself?

Normally the suggested remuneration route for directors is to take a low salary, equal to the Employer/Employee National Insurance threshold for the year, and then take any further income from the company as dividends.

For the 2014/15 tax year these amounts are as follows:

Annual salary of £7,956 £663 pm)
Net dividends of    £30,518

With this mix of income, an individual can take home £38,474 with no income tax or National Insurance due, although the company will have paid corporation tax on its profits.

This route is still the suggested route to follow for directors who have other sources of taxable income expected for 2014/15, such as rental income, bank interest, or employee benefits in kind (e.g. medical benefits, company cars etc), which would use up part or all of their personal allowance. However, a reduction in dividends to take would be suggested to ensure that you remain beneath the higher rate tax threshold for the year.

Will the Employment Allowance make it worth increasing the optimum salary level to take advantage of the saving?

From 6 April 2014 the Employment Allowance came  into effect, whereby (subject to the rules noted later) a company will have an allowance of £2,000 for the year to set against its Employers National Insurance (NI) due on all its employees, so it will not have to pay over Employers NI until that £2,000 is used up.

As a result the optimal salary for a director/shareholder will depend on whether the company employs other staff or not and the salary levels of the other staff.

The Employment Allowance provides an opportunity for certain directors to be able to take out a higher salary in 2014/15 whilst saving their company tax at the same time.

We would suggest a salary of £10,000 which is equal to the Personal Allowance level for 2014/15, rather than the lower National Insurance threshold of £7,956.

When considering the overall picture for salaries, it represents a tax saving of £163.52 per director, per year.

This means that you could take a higher salary whilst saving the company tax at the same time!

Therefore the optimal remuneration package for a director (with no other income) for 2014/15 would be as follows:

  • Gross salary of £10,000
  • Net dividends of £28,678

With this mix of income, an individual can have £38,678 with no income tax payable.

The director will be paying Employees National Insurance of £245.28 (£10,000 - £7,956 = £2,044 x 12%).

The company will save corporation tax of £408.80 (£10,000 - £7,956 = £2,044 x 20%)

If you have other taxable income such as rental income it may be preferable to keep your remuneration package under the traditional route. Also, if the company has a number of other non-director employees then it is likely that the £2,000 exemption would be used up already against their salaries, so the normal remuneration route would be suitable for you as director.

It should be noted that if you take a salary of just above the NI lower earnings threshold of £481 per month, you will get an NI credit towards your state pension, but you don’t pay any tax or NI. However, at that annual salary level (£5,772) you will be “wasting” £4,228 of your tax free personal allowance, unless you have other income to cover it.

To discuss optimal salary levels or the Employment Allowance please contact Desirie Lea on 0151 348 8400 or email ddl@moco.co.uk