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

With the change from one tax year to the next comes a range of different tax rates, allowances and thresholds that can change the way in which you manage your taxes. A company director is typically paid a salary from the limited company, which is calculated very specifically to maximise tax-efficiency. Should you therefore increase or decrease your salary in this new tax year?

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How is a director’s salary calculated?

Because drawing a salary incurs National Insurance for both the employee and the employer, it is more tax efficient for a company director to draw money from the company in the form of dividends.

However, each individual has a personal tax-free allowance that can be utilised when considering tax-planning opportunities.

Typically, the salary of a director is set so it is exempt from tax and National Insurance, but still exceeds the lower earnings limit, so as to ensure the employee will have access to state pension benefits in years to come.

The lower earnings limit for 17-18 is £490 per month. The annual personal allowance for 17-18 has just increased to £11,500, up from £11,000.

Taking into account these factors, the salary of a company director could increase to £680 per month, with no effect on tax or National Insurance. This is an increase from £670 per month in 16-17.

Whilst this is only £10 extra per month on the previous year, it would be the most efficient use of the director’s salary.

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One size doesn’t fit all

This is the general approach and would suit almost all director’s of small limited companies, particularly where you are the sole director.

However, it is always essential to remember that one size doesn’t fit all when it comes to tax planning, and your bespoke situation may fall outside what is relevant under general advice.

Taking an integrated and proactive view to your tax planning, means that opportunities can be maximised so overall you pay the least tax possible.

AJN Accountants specialise in tax planning for small to medium sized businesses, contractors and freelancers.

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