As a director and shareholder of your own company you can decide how much salary to pay yourself each month in order to use your tax-free personal allowance in the most tax efficient way. Any further funds you need can be extracted as a dividend if the company is making a profit.
If you are a director of your company and you don't have a contract that sets out terms of employment with the company, you don't have to pay yourself the national minimum wage. So how much should you pay yourself?
For 2014/15 if you were born after 5 April 1948 you have a tax free personal allowance of £833 per month (£10,000 per year). You could take a salary at that level and pay no income tax, assuming you have no other taxable benefits from the company such as a car.
However, you will pay national insurance (NICs) on that salary as the NICs threshold is only £663 per month. From a gross salary of £833 the company must deduct NI of £20.40 and set-aside employer's NI of £23.46 on top. The company will have an employment allowance of £2,000 for the year to set against its employer's NI due on all its employees, so it won't have to pay over employer's NI until that £2000 is used up.
If you take a salary of just above the NI lower earnings threshold of £481 per month, you will get an NI credit towards your state pension, but you don't pay any tax or NI. However, at that annual salary level (£5,772) you will be "wasting" £4,228 of your tax free personal allowance, unless you have other income to cover it.
Talk to us about the best salary level for you, which takes into account all your other sources of income.
Showing posts with label tax free allowance. Show all posts
Showing posts with label tax free allowance. Show all posts
Tuesday, 1 April 2014
Monday, 7 January 2013
New Tax Free Allowance
The standard personal allowance (amount of tax-free income) for 2013/14 will be £9,440. We had been expecting a smaller increase to £9,205.
The new higher allowance allows an individual to earn £181.54 per week (about £787 per month) tax free. But the NIC thresholds will not increase by as much, so an employee starts to pay NICs on income way below the tax-free threshold.
In 2013/14 the class 1 primary NI earnings threshold for employees will be £149 per week (£7755 per year). Employers will pay class 1 NI on wages of £148 or more per week (£7700 per year). You need to consider the NI costs for both you and your company when deciding how much you can extract from your own company as salary.
If you pay yourself the full personal allowance of £9,440 as salary from 6 April 2013, you will have personal NIC of £202.20 (12% x (9440-7755)) for the year. Your company will also pay £240.12 (13.8% x (9440-7700)) in class 1 NICs. However, the salary and NIC cost is fully tax allowable for the company.
A salary of £7,695 per year (about £147.98 per week) will avoid both employees and employers NICs. But you will get an NI credit for state retirement pension purposes if your salary lies in the range £109 to £149 per week. Unfortunately under RTI (see above), payments of salary in that range will have to be reported to HMRC, so there is no admin saving on paying a low salary.
The new higher allowance allows an individual to earn £181.54 per week (about £787 per month) tax free. But the NIC thresholds will not increase by as much, so an employee starts to pay NICs on income way below the tax-free threshold.
In 2013/14 the class 1 primary NI earnings threshold for employees will be £149 per week (£7755 per year). Employers will pay class 1 NI on wages of £148 or more per week (£7700 per year). You need to consider the NI costs for both you and your company when deciding how much you can extract from your own company as salary.
If you pay yourself the full personal allowance of £9,440 as salary from 6 April 2013, you will have personal NIC of £202.20 (12% x (9440-7755)) for the year. Your company will also pay £240.12 (13.8% x (9440-7700)) in class 1 NICs. However, the salary and NIC cost is fully tax allowable for the company.
A salary of £7,695 per year (about £147.98 per week) will avoid both employees and employers NICs. But you will get an NI credit for state retirement pension purposes if your salary lies in the range £109 to £149 per week. Unfortunately under RTI (see above), payments of salary in that range will have to be reported to HMRC, so there is no admin saving on paying a low salary.
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