[Putting this out late in the tax year (we are in August!) because so many new businesses are being started post COVID-19 lockdown.]
Most tax efficient salary for directors in 2020/21 is £8,788 per annum. This equates to £732 per month or £169 per week. You may top up with dividends.
HOW IS THE TAX EFFICIENT SALARY CALCULATED?
National Insurance (NI) lower earnings limit in 2020/21 is £6,240 per annum. Earnings over this counts the year as a qualifying year for future state pensions.
NI secondary earnings limit in 2020/21 is £8,788 per annum. Earnings over this trigger employer’s NI contributions.
This means that as long as you don’t exceed the secondary threshold of £8,788, you qualify for the state pension without paying NI contributions.
WHAT IF I DON’T TAKE A SALARY?
Why would you not want to take a salary when salary is tax deductible ie any salary you take saves 19% (current corporation tax rate) of the amount in tax. To simplify, if you don’t take a salary, you end up with a higher profit and consequently, higher tax.
You may ask why you don’t take everything in dividends. If you do, you won’t qualify for NI benefits as indicated above. Also dividends are not tax deductible. Dividends are paid from profits after tax.
WHEN CAN I TAKE NO SALARY?
A salary is only tax efficient if there are tax allowances available. If you have other income eg another salary, pension, etc, it may not be advisable to take a salary from your company as all of it may be liable to tax.
CAN I TAKE A HIGHER SALARY?
You can, but it may mean higher tax and NI contributions. Paying dividends is more tax efficient once NI and tax rates are factored in.
WHEN MUST I TAKE A HIGHER SALARY?
If you have a contract of employment with your company, you must pay yourself at least the minimum wage. Also, if the company is making a loss and cannot legally pay dividends (since dividends can only be paid out of taxed profits), taking higher salaries may be the only option.
WHY ARE DIVIDENDS MORE TAX EFFICIENT THAN HIGHER SALARIES?
Though dividends are from taxed profits and then taxed once paid, salaries suffer two NI rates and higher PAYE tax rates.