Blog
17th April, 2019
What Is Directors Optimum Salary?
The amount that you can take from your business is pretty important to you as the business owner, just as important is how to pay the minimum amount of tax possible on the money that you wish to extract.
As a business owner and a Director it is advisable to take a small salary and the balance of your remuneration by Dividend. For the 2019-2020 Financial Year the maximum that can be taken before hitting the higher rates of personal taxation has increased to £50,000.
There are two options as to how you split the salary / dividend depending upon your own financial and business circumstances. The following assumes that you have no other external income apart from the remuneration received through the business.
Directors Optimum Salary Option 1
Directors Optimum Salary Option 1 is for owners / Directors who pay only themselves and therefore do not qualify for employment allowance.
We advise that the basic Director Salary should be at a level of £8,632 per year (719.33 p/m) commencing April 2019. At this level you will not pay any National Insurance or Income Tax, however, you will receive the benefit of your year’s contribution towards your state pension.
Anything that you take above the £8,632 should be classified as a dividend. This will equate to a maximum of £41,368 to avoid going into the higher rate tax territory.
Assuming that you take the maximum possible without paying tax at the higher rate then you will receive £5,868 of the dividend free of tax and the balance of £35,770 will be taxed at the rate of 7.5% (£2,663 of personal tax).
Directors Optimum Salary Option 2
Directors Optimum Salary Option 2 is for Owner / Directors who have salaried staff and are eligible for receiving the employment allowance which reduces the employers National Insurance to be paid by up to £3,000.
In this scenario the Director (s) would take the maximum tax free salary of £12,500 and the balance as dividend (£37,500) This would result in personal tax again being £2,663, however, due to the effect of employment allowance on Corporation Tax, overall option 2 although a little more complex for us accountants, will end up saving you £280 over the year.
We will write to all PGA clients providing advice based on their own personal circumstances.
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