Directors pay from 6 April 2014

From 6 April 2014 there’s now a new choice to be made by Directors in how they pay themselves from their own Limited Company. However, it’s not as simple as it used to be ….

With the introduction of the £2,000 employment allowance in the 2014 Budget there is now more than one efficient way of getting paid from your limited company.

Previously, we always recommended a salary level which was set just below the threshold for paying employees and employers National Insurance ‘NI’ (£641 a month in 2013/2014). However, since 6 April 2014 qualifying companies can now reclaim up to £2,000 of employers NI (not employees), so the employers NI stops being an issue for the tax year 6 April 2014 to 5 April 2015. The employees’ portion of NI is still payable though.

Here are your options:

Option 1

A company director can take a salary of £10,000 a year (£833.33 a month) and pay no personal tax.

They will however incur employees NI of £245.28 (Employers NI of £282.07 would be covered by the £2,000 Employment Allowance as detailed in the 2014 Budget).

This Employee’s NI will be payable to HMRC, monthly/quarterly, however, the payments would not actually ‘kick in’ until the payment is due for the January 2015 salary, and that NI not payable until 22 February 2015 (unless you use the alternative scheme for calculating director’s NIC). Important to note: The directors would need to remember to pay this over to HMRC on time, or face a penalty.

This option is suitable for those Directors who:

  • Have no other sources of income.
  • Can guarantee that they won’t withdraw more than £38,474 (Salary £10,000 and Dividends in your hand £28,678) from their company in the tax year.
  • Don’t employ additional staff with a combined total employer’s NI liability of more than £2,000.

Option 2

This option keeps the salary level below the NI thresholds, so no NI becomes due. The total annual salary that can be withdrawn is £7,956 (£663 per month).

This option is suitable for those Directors who:

  • Have other source(s) of income (rental properties etc.).
  • May exceed total drawings from the company of £38,474 in the year (this is made up of – Salary £7,956 and Dividends in your hand £30,518).
  • Have employees or may start to employ staff during the year and have an employers NI bill of over £2,000.

Option 3

Or finally, if you are unsure, you don’t have to actually make a choice now. You can opt for taking a salary of £663 a month, until the end of February 2015, then, if you then meet all the criteria mentioned in option 1 above, you can pay yourself a bonus of £2,707 in March 2015 to utilise the employers NI saving of £282.07. Please be aware that HMRC will expect the company’s NI payment of £245.28 before the 22nd April 2015.

Whichever option you chose, please remember for the tax year 6 April 2014 to 5 April 2015 the maximum amount that can be withdrawn from your limited company in the year without incurring an additional personal tax liability is £38,474.

So what about the combined company’s/personal tax position?

This is easier to explain with an example:

Assuming a company makes £50,000 pre-tax profits in the year, and assuming a 31 March 2015 year end date.

  Option 1 Option 2 Option 3
Profit 50,000 50,000 50,000
Salary 10,000 7,956 10,000
Taxable profits 40,000 42,044 40,000
Corporation Tax 8,000 8,409 8,000
Employees NI paid 245 0 245
TOTAL COST (CT/NIC) 8,245 8,409 8,245

Option 1/3 gives you £164 more in your pocket. 

The choice really is yours; all we can do is offer advice.