The most tax efficient way to pay company directors

Why do company directors only get paid a salary of £732 a month?

We get asked a lot why do directors of owner managed businesses only get a salary of around £732 a month and what is the most tax efficient way to pay company directors?

The main reason for the low salary is to save tax and to ensure that you don’t pay more than is necessary to HMRC, consequently meaning you get to keep more of your hard earned profits.

A salary of £732 a month is above the National Insurance lower earnings limit of £6,240 per year, this is the amount you have to earn in order to qualify for the state pension, maternity allowance and other benefits.

It is also below the primary and secondary thresholds for national insurance contributions. The primary threshold of £9,516 a year is when employees start to pay National Insurance and the secondary threshold of £8,788 a year is when the employer starts to pay National Insurance.

Consequently, you receive the benefits without having to physically pay National Insurance to HMRC.

The rest of the director/shareholder’s income is then taken as dividends from the profits made by the company, which are taxed at lower rates than if you paid yourself more as a salary.

SHOULD I PAY MYSELF EXTRA SALARY OR DIVIDENDS?

CASE STUDY – OVER £5,000 SAVED

See a brief example below. A company director currently takes a salary of £732 a month (£8,784 a year). Profits remaining for the year are £40,000 and they wonder whether to pay the profits out as extra salary or as a dividend.

	Salary	Dividend
Profits	£40,000	£40,000
Corporation tax (19%)	–	(£7,600)
Employers NI (£31,212 x 13.8%)	(£4,307)	–
Employees NI (£30,484 x 12%)	(£3,658)	–
Income tax (PAYE) (£36,284 x 20%)	(£7,257)	–
Dividend tax (£30,400 x 7.5%)	–	(£2,280)
Retained profits	£24,778	£30,120

As you can see in this situation they would be around £5,300 better off taking the profits as dividend, instead of additional salary. This is currently the most tax efficient way to pay company directors.

The above is a very basic example and this route won’t be the best fit for everybody.

Uncertainty over whether profits will be made, the number of employees you have, whether you can claim employment allowance and relationships with other shareholders will all have an impact.

If any of these apply to your business contact us and we can advise on the best way to tailor your income based on your circumstances.