Directors – does it always pay to take a salary?
You’ve read that for maximum tax efficiency director shareholders should take a salary of £8,424 for 2018/19. But you have more than one business, plus other income. Should you take a salary from each and if so how much?
The bigger picture
There’s a surfeit of advice in the press and online about how much and what sort of income you should take from your company to achieve maximum tax efficiency. The trouble is the advice is usually one size fits all. That’s to say it concentrates on director shareholders whose only income is derived from a single company and tends to overlook the wider and longer-term consequences of taking a salary.
The starting point – salary
For 2018/19, the most tax and NI-efficient salary for an owner manager of a company, who’s under state pension age, is £8,424. That’s the sum you can take before NI contributions are payable for you and your company. But, as we’ve already hinted, that’s not the full story.
If you have other income, say profits from self-employment or investments, which mean you’ll have to pay higher or additional rate tax on some or all your salary, this doesn’t affect the overall tax and NI efficiency of a salary of £8,424; it’s still the best option. It’s not well known, but if it weren’t for NI being payable on salary, it would be more tax efficient than dividends. You should keep this in mind when setting your salary from your company or companies.
If you’re a director of more than one company, or have a paid employment, there are other factors you need to consider when deciding on whether to take a salary and how much it should be.
If you work for an employer who’s not associated with your company, no matter how much you earn, you can still take a salary of £8,424 from your business and it will be tax and NI efficient – more so than a dividend. However, anything you take in excess of £8,424 is almost certain to be more tax and NI efficient as dividends.
Tip.If you earn less than £503 per month (£116 per week) in 2018/19 from an employer who’s not associated with your company, you should take a salary of at least £6,032. This ensures that you’ll receive a credit to your state pension (and other state benefits) record. And, in any event, a salary of up to £8,424 is the tax and NI-efficient option.
Other companies – not associated
If you are a director shareholder of more than one company, and they aren’t associated for NI purposes, the most tax and NI-efficient salary is to take £8,424 from each.
Other companies – associated
If your company shares any resources, e.g. staff, premises and so on, with another company they may be associated employers for NI purposes (see The next step ). In that situation the salaries must be pooled to work out if NI is payable. Therefore, the most tax and NI-efficient arrangement is to take a salary from one or more of the companies which totals no more than £8,424 in 2018/19.
If you are involved with more than one company as an owner manager, but they operate mainly independently of each other, you can take a salary of up to £8,424 from each for maximum tax and NI efficiency. However, if the companies are not independent of each other you should limit your total salary to £8,424.