What is the most tax-efficient annual salary for a company director?

For the 2015-16 tax year, the changed personal allowance has produced two new contenders for the most tax-efficient annual salary for a company director: £8,060 or £10,600. This article outlines the different tax implications of each salary with explanation and examples.

Option A: Annual salary of £8,060.

The company director receives an annual salary of £8,060 from their company, £671.67 a month, and pays no National Insurance or Income Tax, assuming that they only receive an income from this company.

As long as the company has enough retained earnings, the director can pay themselves additional dividends when they need to.

The director’s salary that can be reduced from the company’s sales when calculating its profit chargeable to corporation tax is £8,060.

Here is a simple tax calculation example using the £8,060 salary.

Company Sales: £30,000

Director’s Salary: £8,060

Other Expenses: £10,000

Profit chargeable to Corporation tax: £11,940

Corporation tax bill: £2,388

National Insurance bill: £0

Total tax paid by Company and Company Director: £2,388

Now lets look at what happens when a company director receives a £10,600 annual salary from their company. 

Option B: Annual salary of £10,600

The company director receives an annual salary of £10,600 from their company, £883.33 a month, and pays no Income Tax.

The director will incur Employees National Insurance of £304.80; producing a net annual salary of £10,295.20.

As long as the company has enough retained earnings, the director can pay themselves additional dividends when they need to.

The incurred Employers National Insurance (separate to Employees NI) is covered by the £2,000 Employment Allowance, so no Employers NI will be owed. This is assuming that the Employment Allowance is not already being used to offset the Employers NI liability incurred on the salaries of other employees.

The director’s salary that can be reduced from the company’s sales when calculating its profit chargeable to corporation tax is now £10,600. Compared to option A, this produces a corporation tax saving of 20% of the additional £2,540 salary (£10,600 - £8,060 = £2,540).

Therefore paying a £10,600 salary instead of £8,060 reduces the Corporation tax bill by £508 (£2,540 x 20%).

This nets out to an overall annual saving of £203.20, after paying the £304.80 Employees NI (£508 - £304.80 = £203.20).

Here is a simple tax calculation example using the £10,600 salary.

Company Sales: £30,000

Director’s Salary: £10,600

Other Expenses: £10,000

Profit chargeable to Corporation tax: £9,400

Corporation tax bill: £1,880

Employees National Insurance bill: £304.80

Total tax paid by Company and Company Director: £2,184.80

In summary, for the 2015 – 16 tax year, a company director can save £203.20 in tax by paying themselves an annual salary of £10,600 instead of £8,060.

However, the £10,600 annual salary is only the more tax-efficient option if three conditions are met:

1)      The company is the director’s only source of income.

2)      The company is not already using its £2,000 Employment Allowance on Employers NI that has been incurred on the salaries of other employees.

3)      The company is going to be profitable and will be liable for Corporation tax.

If either one of these conditions isn’t met, then specific calculations would need to be made in order to assess the optimum salary for that director.

If you would like to find out what the most tax-efficient salary that you could pay yourself is, then get in touch via Manchester Professionals, send an email to office@denhamaccountingandtax.com or call me on 07921 490 690. 

HM Revenue and Customs have now started issuing penalties to employers that don’t register for PAYE and report their payroll information to HMRC in real time. For late or non-reporting of payroll reports there is now a monthly penalty of £100. Even companies who only pay a salary to their one company director need to report payroll information to HMRC in real time.

If you would like to know more about HM Revenue & Customs’ payroll reporting requirements and our payroll compliance service that starts at just £195 a year, then please get in touch. My contact details are below:

Email: office@denhamaccountingandtax.com

Telephone: 07921 490 690

Regards, 

William Denham

Denham Accounting & Tax