Optimal salary for a company director - 2018 update

It’s that time of year when we need to look at the level of salary that company directors should be paying themselves from 6th April.

As in previous years, the main question is whether to pay a salary up to the Personal Allowance level or whether to pay a salary to the level at which National Insurance kicks in. We would generally recommend the second option to reduce administration. TL;DR: if the director has no other income and the Employment Allowance will be used up against other staff salaries then the best option would be for the director to be paid a salary of £8,424 (£702 per month). This should be topped up with £37,926 of dividends.

If the director is owed money by the company however they could also charge interest on their loan account so this may be an additional consideration for some. In the following it is also assumed the director wishes to stay below the higher rate tax band threshold for personal income tax. It is also assumed that they have no student loan balance, are not caught by IR35 and have a full personal allowance. It is assumed they are UK resident and have no other income, capital gains and there is no relief from tax to claim such as gift aid or pension payments.

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.