£8,424 per annum is the optimum directors’ salary for 2018/19

£8,424 per annum is the optimum directors’ salary for 2018/19

Changes to the taxation of dividends in 2016/17 and 2018/19 means that the tax position for company shareholders has become increasingly complex.  Knowing how to work within NIC thresholds to ensure tax-efficient, optimum director salaries is also an important consideration.

The conventional approach for director income

Taking a low basic salary with the balance of income being paid as dividends has been a common approach for company shareholders for a long time and continues to be the conventional approach. It provides tax efficiency, both for the business and the individual director shareholder and is based on the following:

  • The director shareholder takes a low salary, no higher than the personal allowance. This means that it does not attract income tax;
  • The salary is set just high enough for national insurance purposes i.e. that it counts as a year’s ‘stamp’ for national insurance history. This helps to protect future entitlement to state pension and benefits;
  • The salary is a tax-deductible expense for the business. This means that corporation tax is saved at 19% on the gross salary;
  • Further income is paid as dividends, which do not attract national insurance and, therefore, means the director shareholder is not paying any more NIC contributions than they need to;
  • The “dividend nil rate band” provides a nil tax position on the first £2,000 of dividend income from 6 April 2018.

The changes to the taxation of corporate dividends introduced in tax year 2016/17 and 2018/19 means that the tax benefits of income paid through dividends have diminished.  However, dividends still provide tax-efficient income, depending on individual circumstances, but increased consideration should be given to ensuring some element of salary is paid and, to this end, it makes sense to talk to us.

The NIC primary threshold is £8,424 for 2018/19.

If you would like more information about how to take your remuneration tax efficiently, or to discuss your tax affairs in general, please don’t hesitate to get in touch.

Steve Crompton
Partner – Head of Tax
direct dial: 01942 292541
mobile: 07790 840394
email: steve.crompton@jsllp.co.uk

Chris Barrington
Tax Partner
direct dial: 01942 292505
mobile: 07730 436070
email: chris.barrington@jsllp.co.uk