What is the optimal salary for a director in 2013/14?

There has always been much debate as to how much a director should pay themselves as a salary in order to maximise the tax benefits. This again has changed due to the introduction of the employers allowance. I have summarised below the optimal salary to be paid to a director providing that he/she does not employ any other staff or if they do, then the staff do not get paid over the national insurance thresholds.  Please note that the calculations have been based on the 2014/15 tax rates and are only relevant for this current tax year.

If you are the sole director and you do not have any other employees

Historically, you would have been advised to take a salary which takes you up to the tax/national insurance thresholds, therefore ensuring that you do not suffer any unnecessary tax or national insurance. This amount for 2014/15 is £7,956pa. This would save corporation tax of £1,591 (20% of £1,591).

However because of the employers allowance introduced this year, the optimal salary which should be paid to a director has increased. This is because the first £2,000 of employer’s national insurance does not need to be paid to HMRC.

Therefore, the director should pay themselves £10,000pa. They would suffer employee’s national insurance of £245, but, they will save corporation tax of £2,000 (20% of £10,000). Also, there will not be any employer’s national insurance as this will be covered by the employer’s allowance. The total saving would therefore be £1,755 (£2,000 – £245). The salary is limited to £10,000 as this is the tax free threshold for 2014/15. any salary above this will incur tax at a rate of 20%.

The recommended salary for a sole director is therefore £10,000. As mentioned earlier, this is only the case if the employer’s allowance is not being used up elsewhere.

There is also the fact that national insurance is payable, whilst it is only £245, some employers would prefer not to pay this, as it will be a while before they actually get the benefit of the corporation tax relief. It could be that the majority of directors will continue to opt to pay themselves under the national insurance threshold (£7,956).

Each case should be considered individually, if you would like to discuss your situation in further detail, then please do not hesitate to contact the experts at Smith & Brown.

Apr 17, 2014