Optimum salary for directors: changes this year

This is one of the questions we hear most often: what is the optimum salary I should take as a director?

There are many salary calculators on the web that you can use but the easiest way in the past has been to take the maximum salary that does not attract taxes nor national insurance, neither for the employee nor for the employee (see our previous article). In 2013/2014 that amount was £7,696 pa. But in 2014/2015, due to the new £2,000 Employment Allowance, there is now a new option for directors' salaries:

1. If the company is able to use all the £2,000 Employment Allowance in the year, then the best route for the Director’s salary will be to pay over the LEL but below the secondary level in 2014/15 i.e. £7,956 pa (£663 per month). The rest will have to topped up by dividends as per in the previous years.
2. For directors who do not have other income and whose company will not use all of the £2,000 Employment Allowance (eg. because there are no other employees), it will be more tax efficient if they take a salary of £10,000 pa (£833.33 per month). The £10,000 will be tax-free but will attract NIC. However, the Employer's NIC will not be payable as long as the Allowance is not used up on other employees. The Employee's NIC should only amount to (£10,000 - £7,956) x 12% = £245.28 for the year, which will be payable through RTI monthly. The Director therefore gets a net £1,799 more in his pocket and the company will be able to claim the additional £2,044 against corporation tax thus reducing the CT liability by £408.80 (£2,044 x 20%). So in paying the Director at this level the Director gets £1,799 more in his pocket and the company liability to tax is reduced by £163.52 (£408.80 - £245.28).