The introduction of Employment Allowance and the increase in the personal allowance to £10,000 has muddied the waters yet more in deciding the optimum salary to take as a director.
Last year I said
This year I’m going to keep it really simple – the optimum salary is £10,000 per annum (£833.33 per month). Any less and you will waste personal allowances, any more and you will start paying too much in National Insurance.
Please note that if the company doesn’t qualify for Employment Allowance or the Employment allowance can be utilised against other employees, £10,000 per annum is wrong.
Likewise, if you have other income (not dividends) to set against your personal allowance, then £10,000 is wrong.
P.S. The reasoning behind paying £10,000 even though it creates a personal NIC liability of £245 is as follows:
- If you wanted to avoid NIC your annual salary would have to be less than £7,956
- You would therefore ‘waste’ £2,044 of personal allowance (£10,000 – £7,956)
- The company would have to pay £408.80 corporation tax on the ‘extra’ profit of £2,044.
- Your (personal) NIC saving would be £245.28
- Overall the company and you would be £163.52 ‘worse off’.
- The company will have to pay £282 NIC on the ‘extra’ £2044 salary but this will be refunded under the Enterprise Allowance scheme.
- Once your salary exceeds £10,000 you will start paying tax at 20% and NIC at 12% (the company will have to pay a further 13.8%*) compared to the company paying corporation tax at 20% on the ‘extra’ profit if you do nothing.
* 11.04% after tax relief