What is the optimum for directors’ salaries in 2015/16?
Following the continuation of the employment allowance into 2015/16, here is the optimum salary for 2015/16 (see our previous blog for more information on the employment allowance).
The old way
Pre the employment allowance, the old way was to take a salary from your limited company at below the primary threshold rate but above the lower earnings limit which meant that no income tax (if no other income) and National Insurance was incurred. The director however was eligible to national insurance credits which build up the entitlement to the basic state pension and some other benefits.
The maximum salary payable in 2015/16 using this method would be £8,059 a year (£671 a month) which generates a corporation tax saving of £1,611.80. Dividends could be taken where distributable profit allowed up to £30,893 without paying any additional tax (if there was no other income to be taxed).
The new way
For businesses that are entitled to claim the employment allowance, then a higher salary can be taken.
If the director has no other income or taxable benefits, the full £10,600 income tax allowance could be used.
The director would pay £304.79 in employees’ National Insurance (which will also increase the entitlement to state benefits) but the company would save £508.20 (in comparison to the old way, total saving £2,000) in corporation tax, increasing the amount available for distribution as dividends by the same amount.
The employers’ National Insurance of £343.34 will be offset against the employment allowance.
Dividends could be taken where distributable profit allowed up to £28,606.50 without paying any additional tax (if there was no other income to be taxed).
There are a number of factors to consider when determining the optimum salary to take from a company as a director including other taxable income, taxable benefits and other employees. If you would like advice on your optimum directors salary for 2015/16 then please contact us for more information.