From April 2014 there’s a new way to pay Directors from their Limited Companies. But, it’s not as simple as it used to be!
The introduction of the £2,000 employment allowance has resulted in there being more than one optimal way of getting paid from your company.
Let me explain.
Previously, we have always recommended a salary level just below the threshold for paying employees and employers National insurance (£641 a month in 2013/2014). However, qualifying companies can now reclaim up to £2,000 of employers NI (not employees), so the employers NI stops being an issue. The employees portion of NI will still be payable.
Here are the options…….
The company director can take a salary of £10,000 a year (£833 a month) and pay no personal tax. They would however incur employees NI of £245.28. This would be payable to HMRC. Company directors would need to remember to pay this over to HMRC on time, or risk a penalty.
This option is suitable for those who:
Have no other sources of income
Can guarantee that they won’t withdraw more than £38,474 from their company in the year
Don’t employ anyone
Happy to remember to pay an additional bill from HMRC and are comfortable with any cash flow issues that may arise.
This option keeps the salary payment below the NI thresholds so no NI payments become due. The total monthly salary that can be withdrawn is £663 per month (£7,956 a year). This option is suitable for those who:
May have another source of income (rental properties, second job etc.)
May exceed total drawings from the company of £38,474 in the year
Have employees or may start to employ during the year
Don’t want to have to remember to pay extra bills to HMRC.
Whichever option is chosen, the maximum amount that can be withdrawn from the company in the year is £38,474 without incurring additional tax charges.
So, if you chose option 1 then you could withdraw £28,678 in dividends before paying tax
If you chose option 2, you could withdraw £30,518 in dividends before paying any tax.
We’ve worked through the numbers and for those who meet all the criteria, option 1 saves £163.52 in tax over the full year (which is £408.80 in Corporation tax less £245.28 Employees NI).
Our recommendation & approach
None of us know exactly what the future will bring.
That being the case, we’d recommend taking a salary of £663 a month, until February next year. If you then meet all the qualifying criteria for option 1, you can pay yourself a bonus of £2,044 in March to utilise the £163.52 tax benefit. Please be aware that HMRC will expect NI payment of £245.28 before the 19th April.