Why run a Directors wage rather than just take income as a dividend?
Each year most people get an amount that you can earn tax free. For the year 6.4.2021 to 5.4.2022 this amount is £12570. A limited company does not get a tax-free amount it can earn, it pays corporation tax on all profit. Taking an income from a limited company purely as a dividend will mean you pay corporation tax on the entire amount. To claim some income tax free, it has to go through payroll as a Directors salary (Director remuneration).
What is the most tax efficient wage for a Director for 2021/2022?
There are 3 possible amounts you could take as a Directors remuneration, but each amount will benefit you based on different scenarios so below we cover each scenario.
Scenario 1, Sole Director, no staff earning enough to pay national insurance and you do not want to have to pay national insurance either:
In this scenario you have no other staff or no staff who are subject to employers’ national insurance. You also do not want to have to pay national insurance on your income.
The most tax efficient annual Directors salary is £8840.00.
This will be a corporation tax saving of £1679.60 at a corporation tax rate of 19%
You will have no national insurance to pay.
Scenario 2, Sole Director, no staff earning enough to pay national insurance, but you would rather pay a little national insurance and save more tax:
In this scenario you have no other staff or no staff who are subject to employers’ national insurance. You would prefer to pay a little employers’ national insurance and save more on corporation tax. You will not be able to claim employers’ national insurance allowance as it is not available for single Director companies.
The most tax efficient annual Directors salary is £9568.00.
The employers’ national insurance will be charged on the difference between £9568 minus £8840 but there is no employees national insurance to pay.
Employers’ national insurance cost at 13.8% is £100.46.
Corporation tax saving on the Directors salary + the employers’ national insurance is £1837.01.
This will be a net tax saving of £1736.55 (£1837.01 minus £100.46) at a corporation tax rate of 19%.
Scenario 3, There is more than 1 Director, or you have other staff who earn enough to pay national insurance:
Where there is more than 1 Director or other staff who earn over £8840 so employers’ national insurance becomes due, you can claim employment allowance.
The most tax efficient annual Directors salary for both (or more) Directors is £12570.00
Employers’ national insurance cost £0 after employment allowance claimed.
Employees national insurance cost will be at 12% £360.24.
Corporation tax saving £2388.30
This will be a net tax saving of £2028.06 per Director. (2388.30 minus £360.24)
What is Employers’ allowance?
Claiming employers’ allowance means employers can reduce their employers’ class 1 nation insurance bill by up to £4000. This allows employers to employee people at a higher rate of income without having to pay employers national insurance at 13.8% on the higher salary until the employers’ national insurance bill is more than £4000. It is not available where the only employee liable to pay national insurance is the 1 sole Director. It is only available as one £4000 allowance per employer. It is available where the companies’ combined employers’ national insurance class 1 was less than £100000 in the previous tax year. If you have multiple payrolls, the £4000 allowance can only be claimed against 1 payroll. To claim the employment allowance your payroll software should have a box where you can put “yes” to claiming employment allowance.
What is the most tax efficient wage for a Director if the Director has other income such as property income etc?
Where the Director also has other income such as property income, self-employed income, pension income etc, we advise a professional calculation is done so all your circumstances can be considered.
What are my next steps?
If you are confident with deciding your own Directors salary make sure you update your payroll for April 2021.
If you feel you need more guidance, get in touch and we will help light the way.