Should I increase my director’s salary this tax year?

Written by yasiradnan94
20 June 2016

should-increase-directors-salary-16-17

For directors of limited companies it is important to calculate the most tax efficient way to take out money from the company for personal use. Ensuring you have taken advice on the best mix of salary versus dividends, means more net take home pay for you.

Despite changes to the dividend tax system in 2016-2017, dividends are taxed at a lowest rate, compared to tax on salaries. Also, dividends are not subject to National Insurance Contributions (NIC’s) like salaries are.


Salary versus dividends

Getting the right mix of salaries and dividends is vital for good tax planning and typically the aim is to take the lowest salary possible to avoid PAYE (income tax) and NI. After taking a small salary, other drawings can be taken as dividends.

The limits that determine where Income Tax and NI are charged do change frequently, meaning that the recommended salary for a director can also change, in line with new legislation.


Changes to the limits for 16-17

In 2016-2017 the tax-free personal allowance increased from £10,600 to £11,000, meaning £400 of income per year can be earned without being subject to Income Tax.

However, despite this increase to the Income tax limit, the NI limit is more relevant.

The NI limit remained the same for 16-17 so for this current tax year, your director’s salary can remain the same as last year.

Need more help in determining your salary to dividend mix? Are you new to contracting and need more advice in this area?

Tax planning is essential, especially in light of changes to the dividend tax system and the NI limit remaining the same this year. Other ways to save tax can be explored with a qualified, professional accountant.


AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.

 

Please contact us for more information:
E: [email protected]
T: 020 3866 8951

twitter
Follow AJN Accountants on Twitter for regular updates.

 

 

Student loans, property and pensions

Student loan repayments (SLR) are normally deducted under PAYE from employment income so many people incorrectly assume that SLR are not due on other 'unearned income' such as rent or pensions. SLR will in fact be payable where the unearned...

Getting ready to retire

The changes to the pension rules announced in the Spring Budget were designed to dissuade higher earners from retiring early to avoid pension charges on high contributions but the new rules could have the opposite effect. Individuals can now contribute up to £60,000...

Pension allowances increased

The Chancellor announced the relaxation of three different pension allowances to encourage older taxpayers to remain an active part of the workforce or to return to employment if they have retired early. The pensions annual allowance provides a cap on the...

Related Posts

Summer Placements

As we approach the summer holidays, it is not unusual for business owners to receive requests from friends/family for their children conducted a summer placement. In such a scenario it is important to carefully consider the below factors before accepting any children...

Student loans, property and pensions

Student loan repayments (SLR) are normally deducted under PAYE from employment income so many people incorrectly assume that SLR are not due on other 'unearned income' such as rent or pensions. SLR will in fact be payable where the unearned...

We use contact information you provide to us to contact you about our relevant content, products, and services. You may unsubscribe from these communications at any time. For information, check out our Privacy Policy.