Optimum Salary 2019/20

Working out the most tax-efficient way to draw down income from your company is a  priority for limited company owners.  This is because as a limited company director you have a lot more flexibility over how and when you pay yourself, which can be used to maximise tax efficiency.

What is the optimum salary level for directors for 2019/20?

We recommend Directors draw a salary from their company, as this cost is deductible against the company’s Corporation Tax bill.  However the tax benefits of drawing a salary diminish as you pass through the prevailing income tax and national insurance thresholds.  So setting the salary at the correct level is crucial.

a)  Single Director £8,632 salary

  • For single directors with the full personal allowance £8,632 is the optimum salary.
  • You will not pay any income tax, employee or employer’s national insurance on this salary and it will be deductible against your company’s Corporation Tax bill
  • This salary level is above the Lower Earnings Limit for National Insurance required in order to qualify for state benefits (for 2019/20, this is £118 per week).

b)  Multiple Directors £12,500 salary 

For companies with more than one director a higher salary can be more tax efficient due to the availability of the Employment Allowance (EA):

  • The EA, which was first introduced in April 2014, will refund any Employers’ NICs your company pays, up to a maximum of £3,000.
  • If you pay yourself £12,500 during the current tax year, you will pay no income tax at all, the salary is deductible against your company’s Corporation Tax bill, and you’ll pay £464.16 in Employees’ NICs.  The £533.78 Employers’ NICs will be refunded via the Employment Allowance (EA) scheme.
  • You will be around £271 better off per year as a result of the corporate and personal tax savings compared to the £8,632 salary level.

What about dividends?

After you have decided upon the right salary level to pay yourself during the tax year, your remaining income should be  drawn down in the form of dividends.  Your company is entitled to distribute dividends from its retained profits, i.e. the profits in the company after all expenses and tax obligations have been met.

There are no rules which dictate how often you declare dividends; the key thing is that the company must have sufficient profits to do so at any given time.

Dividends are taxed as your top slice of income at the following rates:

  • 7.5% (basic rate)
  • 32.5% (higher rate)
  • 38.1% (additional rate).

There is a £2,000 ‘dividend allowance’, however, this sits within your existing tax bands.