As a Contractor working through your own Limited Company you can maximise your post-tax earnings by paying yourself a low salary and the balance in dividends from your Company profits- keeping the salary low would minimise the amount of NICs you have to pay (dividends do not qualify for National Insurance).
A common question we face is “How much Salary Should I Pay Myself as a Director?” and there is no definitive right answer, because every contractor’s tax position is unique. The objective is generally to strike a balance between paying sufficient salary to qualify for state pension and other benefits and generating the most tax efficient income for you, the contractor.
We would suggest that as an employee of your Limited Company, you take a salary of £10,600 a year (£883.33 per month) which is equal to the Personal Allowance level for 2015/16, rather than the lower National Insurance threshold of £8,060.
Although you will however, incur employees NI of £845.28 (£10,600 – £8,060 = £2,540 x 12%) for 2015/16, the company would save corporation tax of £408.80 (£10,600 – £8,060 = £2,540 x 20%).
There would normally be Employers National Insurance on the extra salary above the threshold of £350.52 (£10,600 – £8,060 = £2,540 x 13.8%), however this would be exempted by the new £2,000 Employment Allowance. From 6 April 2014 a new Employment Allowance came into effect, whereby employers can claim up to £2,000 off of their Employers National Insurance (Class 1) contributions for the year.
Please note, the National Minimum Wage requirements do not apply to company directors and office holders e.g. company secretaries.
At QAccounting we provide a Salary and Dividend plan that is designed to help minimise the tax you pay and maximise your income and as we are now approaching a new Tax Year, over the next few weeks we will be contacting you to provide you with an updated Salary and Dividend plan for the 2015/16 tax year.
To help ensure your Salary & Dividend plan accurately reflects your current circumstances, we need your up to date financial information. Although our records may already hold some of this information on your behalf, it’s important we get confirmation of your details as these may have changed.
It’s important to note that should you opt for a strategy which results in an income (dividends and salary combined) above the higher rate tax threshold, you will incur a personal tax liability at the end of the tax year.
The article outlines the typical tax payment dates and methods of estimating the values of tax payable for each type of tax, including VAT, PAYE, NIC, CIS, Corporation Tax, and Dividend and Personal Taxes.
Rishi Sunak has proposed a number of changes to the way that Corporation Tax will be calculated and applied. Learn more.