Directors have a unique role in a business. They can divide their pay into a basic salary and dividends. This allows them to organise their salary in such a way that reduces their director salary tax obligations.
Here we will look at the salary tax saving options for directors to help directors decide which option is best for them.
Two salary recommendations based on your needs
This year there are two broadly recommended salaries from tax planning experts: £9,100 and £12,750. They are suitable for different financial situations and the rest of the Director’s salary would be paid as a dividend. These two amounts allow Directors to minimise their tax exposure in different ways.
£9,100 salary
The £9,100 salary has the advantages of no income tax liability, no employee National Insurance Contributions (NICs), no employer NICs, and falls below the Lower Earnings Limit, qualifying the Director for state benefits if necessary.
£12,750 salary
The £12,750 salary also has no income tax liability, a small amount of employee NICs on the earnings between £9,100 and £12,570, employer NICs of £478.86 on earnings above £9,100 and maximises use of the Personal Allowance.
The implications of the salary options
Those are the key facts, but both have wider implications. For example, the £12,750 option will affect businesses attempting to save corporation tax, as the higher salary will offset more corporation tax.
The £9,100 option will simplify payroll, as they will not have to consider employee or employer NIC contributions and can improve immediate cashflow due to the lower tax obligations, and a larger share of the payment will come through the dividend, which may further affect tax considerations.
Tax planning strategies for companies often conclude that the £9,100 option is better for sole directors and the £12,570 option better for businesses with multiple directors. However, it is always best to consult a tax expert who can use their knowledge to assess the business’s financial situation and make appropriate and financially shrewd recommendations.
Learn more about how Joseph Skinner at J Sweeney Accountants can help with your tax salary saving options.