Optimum Directors Salary 2015/16

Optimum Directors Salary 2015/16

From 6 April 2015 Directors have a decision to make, just like last year, Directors have to decide how they pay themselves from their own Limited Company. Remember last year, that’s right 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 yet again the employers NI stops being an issue for the tax year 6 April 2015 to 5 April 2016. The employees’ portion of NI is still payable though.

Here are your options:

Option 1

A company director can take a salary of £10,600 a year (£883.33 a month) and pay no personal tax.

They will however incur employees NI of £304.80 (Employers NI of £343.34 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, in most cases the payments would not actually ‘kick in’ until the payment is due for the January 2016 salary, and that NI not payable until 22 February 2016 (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/and or interest.

This option is suitable for those Directors who:

  • Have no other sources of income.
  • Can guarantee that they won’t withdraw more than £39,206.50 (Salary £10,600 and Dividends in your hand £28,606.50) 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 employees or employers NI becomes due. The total annual salary that can be withdrawn is £8,060.04 (£671.67 per month).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 in excess of both their personal tax allowance of £10,600 and the basic rate tax threshold of £31,785 in the tax year.
  • 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 £671.67 a month, until the end of February 2016, then, if you then meet all the criteria mentioned in option 1 above, you can pay yourself a bonus of £3,211.63 in March 2016 to utilise the employers NI saving of £343.34. Please be aware that HMRC will expect the company’s NI payment of £304.80 before the 22nd April 2016.

Whichever option you chose, please remember for the tax year 6 April 2015 to 5 April 2016 the maximum gross (gross salary and tax credit inclusive dividends) amount that can be withdrawn from your limited company in the year without incurring an additional personal tax liability is £42,385.

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 2016 year end date.

Option 1 Option 2 Option 3
Profit 50,000 50,000 50,000
Salary 10,600 8,060 10,600
Taxable profits 39,400 41,940 39,400
Corporation Tax 7,880 8,388 7,880
Employees NI paid 305 0 305
TOTAL COST (CT/NIC) 8,185 8388 8,185

Option 1/3 gives you £203 more in your pocket.

The choice really is yours; all we can do is offer guidance. Remember, the above is an illustration only and as such you should always seek professional advice before acting.