Directors' Remuneration for 2019/2010
Small owner-managed companies will usually pay their directors a small salary and dividends. The level of the directors’ salary is usually set in order to avoid any monthly income tax and national insurance deductions. On this basis, to use all the basic rate tax band, the recommended remuneration package for the 2019/2020 tax year is:
This assumes that sufficient accumulated post-tax profits are available to pay the full dividend to utilise all the basic rate band of £50,000 (2018/19: £46,350). You should discuss with your accountant how you can monitor this with regular management accounts. See our earlier blog post: Management Accounts.
If you have another director or an employee in your business, you can take advantage of the £3,000 Employer's Allowance in which the first £3,000 of Employer's NI is rebated. In this case, the directors can pay themselves £12,500 and dividends of £37,500. This results in an additional tax saving of approximately £270 (between one director and the company). You will have to make a small payment of national insurance to HMRC every month (quarterly on request). Many directors can't be bothered with this and stick to the minimum salary and no NI.
Is this always right?
The above strategies minimise tax but there may be circumstances in which you might decide to pay yourself a "proper" salary such as:
- You need to borrow money (loans and credit cards) and need to show a reasonable income.
- You are looking to rent a property.
- You need a mortgage. Discuss this well in advance with your accountant or mortgage broker as different lenders have different views on owner-managed businesses.
- Your shareholders' agreement with the other owner managers may determine salary levels.
- You might be concerned about your director's loan account getting out of control and finding that the company doesn't have enough profits for the necessary dividend.
- If you are planning to sell your business, a prospective purchaser will adjust your P&L to reflect the market salaries of the directors. For transparency and planning, you may wish to start paying the market salaries.
In short, it depends on individual circumstances but don't let the tax tail wag the dog. You don't want to reduce your housing options or your borrowing capacity just because you wanted to save a few £s in tax.
Note: This guidance relates to the 2019/2020 tax year. The tax rates and allowances are different in Scotland. Everyone's circumstances are different and this article is general guidance only. You should take advice from your accountant before deciding what is appropriate for you.