As the dust settles on the January tax rush, we can now look forward to the rest of 2019, and help our clients make it an even better year for their businesses. As of 6th April, we enter a new tax year. This means we must start planning in terms of tax savings. Please see below the summary of a few important things related to the optimal salary.
1. Minimum Wage, Optimal Salary for 2019/2020 & Employment Allowance:
From 6th April 2019, These rates are for the National Minimum Wage. The rates change every April.
|Year||25 and over||21 to 24||18 to 20||Under 18||Apprentice|
|April 2018 (current rate)||£7.83||£7.38||£5.90||£4.20||£3.70|
As some of you will have employees on an hourly basis, therefore the next payslip we generate will have an updated ( April 2019) hourly rate.
1.1 Optimal Salary for the Sole Directors & Only Employee of the company
Traditionally, if you are the director of an owner-managed company, you would pay yourself a small salary, which is just enough to maintain your National Insurance Contribution records and extracting profits above that level as a dividend. To ensure that the year counts for contribution purposes, the optimal salary needs to be at least equal to the lower earnings limit for Class 1 National Insurance contributions (NICs). For 2019/20, this is set at £118 per week – equating to an annual salary of at least £6,136 for the tax year.
The optimum director’s salary that can be paid free of NICs is equal to the lower of the primary and secondary threshold – for 2019/20, this is equal to £8,632 a year. At this level, the salary can also be paid free of tax (as it is covered by the personal allowance). The salary is deductible for corporation tax purposes (generating a tax saving for the company about £1,640).
1.2. Employment Allowance:
The introduction of the employment allowance in April 2014 enabled employers to not pay the first £2,000 of employers’ national insurance. This then increased to £3,000 in and remains at that level for 19/20.
Typically the employment allowance means that it is slightly more tax-efficient to take a gross salary all the way to the tax-free personal allowance level (£12,500 for 19/20), however, HMRC announced that from 16/17 the employment allowance would not be available to companies where the only person on the payroll is a director, i.e. ‘single director employee’ limited companies.
Therefore, The optimal salary of 2019/20 will depend on whether or not the employment allowance is available.
Scenario 1 – Employment allowance is not available
This will be the case in a one-man company where the employee is the sole director (or where the employment allowance is used up elsewhere). For the purposes of this illustration, we are assuming that the director has no other income besides his salary and dividends and that the personal allowance is fully available.
The director’s salary that can be paid free of NICs is equal to the lower of the primary and secondary threshold — for 2019/20, this is equal to £8,632 a year. This means the optimum director’s salary 2019/20 can also be paid free of tax (as it is covered by the personal allowance). The salary is deductible for corporation tax purposes (generating a tax saving for the company of £1,640).
From April 2019 onwards, the optimal salary for the sole director is £719.33 per month (it does not attract any tax or N.I Contribution) and anything on top can be withdrawn in terms of the dividends from the company. A salary of £8,632 will still give you a qualifying year for state pension entitlement.
Please note, Transfers for dividends into your personal account should always be made separately from salary payments.
Scenario 2 – Employment allowance is available – where a company has more than one employee
This will be the case if there is more than one employee (or the only employee is not also a director). It is assumed that the employment allowance is not fully utilized elsewhere (if you have other employees whose salaries utilize the entire allowance, then you want to pay yourself the figure from scenario 1).
The availability of the employment allowance makes it beneficial to pay a salary equal to the personal allowance – £12,500 for 2019/20. Although the employee’s NIC is payable on the salary in excess of the primary threshold (£8,632), the employer’s NIC liability that would otherwise arise on the salary in excess of £8,632 (i.e. £533 being 13.8% of £12,500 – £8,632) is covered by the National Insurance employment allowance.
At a salary of £12,500, employee NICs of £464 (12% (£1,2500 – £8,632)) is payable.
However, as salary is deductible for corporation tax purposes, the additional salary of £3,868 (£12,500 – £8,632) paid in excess of the primary threshold saves corporation tax of £734 (£3,868 @ 19%). This more than outweighs the employee’s NICs of £464, generating an overall saving of £270.
It is not worth paying a salary in excess of the personal allowance even if the employment allowance is available. Any salary above the personal allowance will be taxable and the combined effect of tax at 20% and employee’s National Insurance at 12% will outweigh the corporation tax saving of 19%.
Kindly Act Now:
Kindly ensure, you change the direct debit/standing order if you were taking a different salary last month (or last tax year). You will be taking a new salary, according to the suitable options. Furthermore, kindly confirm what option you are going for so that we can run April 2019 payroll without any interruption. If we do not hear from you, we will file payroll with £719.33/month for those who were taking £702 in the last tax year.
Should you wish to take more salary from the company, you can do that. It may attract some tax & national insurance contributions.
Should I pay myself salary or dividends? Dividends don’t count as business costs towards your corporation tax calculation. But shareholders may have to pay income tax if the payment they receive exceeds the dividend allowance.
The tax-free dividends limit for 2019/2020 is £2000/year. While the personal allowance of £12,500 (2019/2020) can add to give shareholders a tax-free threshold of £14,500. But only if their sole source of income is from dividends only.
Dividends above this level will taxed at 7.5% (basic rate – upto £37,500), 32.5% (higher rate – for income between £37,501 – £150,000), and 38.1% (more rate – for income above – Over £150,000).
With the increase in the higher rate tax threshold, more dividends can be taken from the Company before hitting the 32.5% tax rate. The optimum amount of dividends for most people in each tax year will be:
- £37,500 per year (6 April to 5 April) or £3,125 per month, if on a salary of £12,500 per year.
- £41,368 per year (6 April to 5 April) or £3,447.33 per month, if on a salary of £8,632 per year.
You must take account of any other income you receive and reduce the dividends. If you want to remain below the higher rate tax threshold.
4. Workplace pension:
From 6th April 2019, the minimum amounts being paid into a workplace pension have been increased. It has increased to 3% of earnings for employers and 5% for employees giving a total least contribution of 8%. It is possible for both the employer and employee to contribute more than the minimum required by law. Your employees should be aware of such changes, if not kindly inform them.
Are you looking for a tech-savvy accountant who doesn’t bore you with finance details? Let our accountants in London make things easier to understand for you. We’re friendly, proactive, young and keep up with all the latest developments in your business to make sure you’re on top of your game.
Please feel free to contact us if you have any questions, or need further information.