Salary for directors, the do’s and don’ts.

This is the start of on ongoing series of posts that will address the most tax efficient ways of extracting value from your business.

A salary is the reward for your effort as a director and as such does not have to be linked to profitability. As such, unlike dividends, it can be paid to a director even when your company is making a loss. These losses can be carried forward to be used against future years profits. But if done incorrectly this can be the least tax-efficient way to extract value from your business.

Before you receive payment from your business salary, Pay as You Earn Tax (PAYE) and National Insurance (NI) must be deducted by the business, to be paid over later to HMRC.  As long as the director does not have a contract of employment for work with the company the HMRC states that the National Minimum Wage (NMW) and the Living Wage ( LW) provisions do not apply.

Assuming a basic tax code for 2017/18 of 1150L, the first £11,500 of your salary can be taken free of income tax and the first £8,164 per year is also NI free. Also your company will also benefit from taking out this level of salary, as it will reduce the profits and hence the tax you pay on them. Currently there is also a £3,000 per year allowance against your Employers NI and to take advantage of this you must be deducting a salary. Payment of Employees NI will also benefit you as this will entitle you to the main state benefits including state pension.

If you consider that the above affects and you do not  know what to do about it then please contact us via the contact page on our website or e-mail me direct on tony@milestone-solutions.co.uk. for greater peace of mind.

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