Like so many tax issues, a simple question produces a complicated answer! Rather than follow this route I shall simplify it by introducing the following assumptions:
- The director wants a salary which saves the most tax and National Insurance; but
- Wants to preserve his/her entitlement to state benefits.
To preserve your entitlement to a state pension you need a certain number of qualifying years. In 2012/13 you need to have £5,564 or more of earnings. This figure is 12 times the Lower Earnings Limit (LEL) of £464 (well nearly!).
Paying yourself a salary of this amount would mean that 2012/13 was a qualifying year and neither you nor your company would pay any tax or National Insurance.
Sadly tax isn’t that easy. If your salary is only £5,564 and you have no other income, you’re wasting £2,541 of your personal allowance. The obvious answer of paying yourself £8,105 isn’t the right answer though because the cost of the extra National Insurance will cancel out the tax savings. Neither is paying yourself £7,488 to avoid paying the National Insurance above the Secondary Threshold.
In this situation, the optimum salary is £7,605 per year (£634 per month) It will cost £16.15 in Employer’s National Insurance but it will save more than £400 in corporation tax compared to paying the LEL of £5,564.