Tax Planning, Accountancy and Business Development Advice
Based on 20 Years Experience as Practising Chartered Accountants
Director / Shareholder - Salaries Or Dividends?
The most tax effective arrangement is usually a combination of both.
The ideal situation (if company profits are below £300,000) is to take a low salary and all other income as dividends. At Hanley & Co, we aim to balance the Corporation Tax savings of a slightly higher salary with the desire to minimise National Insurance contributions.
£5,305 per annum is the minimum salary that most accountants would recommend. A director who receives at least this amount in salary is guaranteed entitlement to all the main State benefits. At this level there will be no N I contributions but the individual is credited with a free contribution record for the year.
Employers N I is only deducted on earnings over 7,072. So an annual salary of £7,072 is also a possibility.
However, the 'tax free', personal allowance for tax has recently increased to £7,475.
Therefore (as long as profits allow), for 2011/12, we suggest a salary of £7,500 per annum for most of our company directors / shareholders.
The N I at this level is quite nominal. More importantly, the director's combined 'take home pay' (net salary and after-Corporation-tax dividends) is actually £354.11 more than when the salary is the minimum £5,305. This is because the total PAYE, N I and Corporation Tax owed to HMRC is £354.11 lower.
Calculations to demonstrate this are set out below:
