As the owner and director of your own company you decide how much salary to take each year.
Paying yourself a small salary can be a good way to maintain your national insurance record to build up state benefit entitlements.
In the tax year 2021/22, if you take a salary of between £6,240 and £8,840 (£736 per month) you will pay no income tax and no employee/employer class 1 NICs, but you will get an NIC credit towards your state pension.
Technically, you could pay yourself a slightly higher salary up to £797 per month (£9,568 for 2021/22). You’d still pay no income tax and employee NICs, but your company would end up paying a small amount of employer’s NICs. This additional salary and employer’s NICs would receive corporation tax relief in your company, so your company would be slightly better off (by about £50 in the year).
We don’t recommend this slightly higher salary of £797 per month, as you’ll have to remember to pay the employer’s NIC to HMRC on time during the year. For a net tax saving of around £50 in the year, we advise clients to keep things simple, and avoid the risks and hassle of paying employer NICs via the PAYE system.
Where your company employs at least one other person in the year, it may qualify for the employment allowance of £4,000 which covers the cost of employer’s Class 1 NIC up to that cap. We can help you check if your company can claim the employment allowance for 2021/22.
The ideal salary of a director will depend on a number of factors. We can help confirm what the optimal salary is for you in 2021/22. Directors who are also shareholders of their company often extract further cash as dividends using the £2,000 dividend allowance and the lower dividend tax rates of 7.5% and 32.5% to minimise their tax bills.
Everyone’s financial circumstances are different so please discuss your position with us before deciding on the level of salary and dividends to take for the year.
If you need help with this or any other accountancy, tax and small business issues, get in touch for a no-obligation discussion – see our Contact Us page for how to reach us.
Keeping you compliant | Saving you tax | Helping you grow
Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Whyatt Accountancy and the writer accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.