In most cases, company directors have the discretion to pay themselves a salary of their choosing.
For many directors, a company salary which achieves maximum tax-efficiency, whilst protecting their state pension eligibility is the best approach. A salary of this type avoids an income tax and national insurance charge (for the company and the director), whilst being sufficient to reach the lower earnings limit. This Lower Earnings Limit is important to reach to ensure a qualifying year for the state pension. Yes, you read that right, something for nothing from HMRC!
The optimum directors salary for 2021/22 will be £8,840 per annum, £737 per month or £170 per week. This is a small, but welcome, increase on the prior year figure of £8,788.
A salary is just one method of a company director extracting cash from a business. If the business is profitable, dividends can be drawn. However, drawings from a company that is not profitable, in excess of the salary which is declared, can be very problematic and result in a directors loan account owed to the company. This loan can suffer a hefty 32.5% charge, which is not refunded until the loan is repaid. Therefore, it can be beneficial for directors of business who are not currently turning a profit to pay themselves a higher salary, albeit attracting tax and NI, to avoid falling into 'debt' with your own business.
Any director who has other sources of income, such as from other employment, property or pensions should seek personalised advice on the appropriate salary for them.
As mentioned, a key benefit of a director's salary is to accumulate the required NI contributions over the working lifetime. Currently, a full record of 35 years is sufficient to achieve the maximum state pension. Those who have worked up to, or beyond that period should check their State Pension Forecast, and seek specialist advice for a bespoke plan.
The salary paid to a director is a deductible business expense, so it will result in a lower corporation tax bill. This is useful to know, that in circumstances where a higher salary is being run at the expense of tax and NI, that some Corporation Tax could be being saved.
Many other factors come into play when setting a salary level. Bear in mind the opinion of lenders, who could view a mortgage or loan application showing a low income level as a negative factor. It has also been highlighted during the pandemic that such a low salary, as declared by many directors, has left thousands outside the government's support system, who have not recognised the 'low-salary, high-dividends' payment model that has operated for years.
At Price Accounting, we offer bespoke advice from day one to ensure you operate tax-efficiently, including advising on a salary level that works for you.