The salary that a one or two person owner-managed company pays its director(s) is entirely up to the board.
The normal advice given is to pay a minimal director’s salary and take any remaining profit as dividends in order to minimise the liability to National Insurance Contributions (NICs). So what director’s salaries should be set? There are a number of issues to consider:
- Are there there other shareholders? If there are then it may be that a director will be paid a competitive salary to compensate for the work they do in the business. However that will attract both employer and employee NICs and so thought ought to be given to a strategy that involves issuing different classes of shares in order to share income equitably, rather than paying a large director’s salary.
- Does the director have other income to use their personal allowance? If they do then they may not need any director’s salary to use their personal tax allowance or keep their NI contributions up to date, and can just be remunerated through dividend payments.
- Does the business have any other employees which enable them to claim their Employment Allowance, the £3,000 discount on class 1 NICs, offered by the government. If not then a larger director’s salary might make sense.
It is important to review all of the director’s personal financial circumstances before deciding on the right strategy. Clearly it is important that they use all of their personal allowance and maintain a full NIC record for the year in order to preserve their state pension entitlement.
Even if there is no other income, some will then decide to pay a director’s salary which uses all their personal tax allowance of £11,000 in 2016/17, others to pay only up to the Lower Income Limit for NIC purposes, which amounts to £5,824. Whichever you choose please make sure you understand the issues and how they apply to your situation.
If you would like to discuss any of the above, please get in contact with us on 01295 720500 / 07724 047172 or firstname.lastname@example.org