Director's salary

OK, I've just realised I've boobed, and forgotten my personal tax allowance, so it's actually around £7k before I hit the higher tax bracket, but the question remains, what is the lowest "acceptable" salary for a director?

Zero. You don't *have* to pay yourself any salary at all.

The problem is that usually when this question is asked, it is asked from the perspective of someone who does not also have a full time job.

For someone whose only source of income is his company, paying himself a salary equal to the personal allowance has the advantages that:

1) It doesn't get taxed under corporation tax because as far as the company is concerned it's an allowable expense reducing its taxable profit. 2) It doesn't get taxed under income tax because its the PA. 3) It gives you credit for NI contributions without either you or the company having to pay them.

But for someone in your position, whose PA is already used up and who does already pay NI, it would be more appropriate to take all your company remuneration as dividends.

You can pay yourself approximately (£38k-£31k)*0.9 = £6300 in dividends without any tax becoming due. Any amount above that will be taxed at 25%. Of course the business will pay CT at 19% on all its profit, so in effect those £6300 will represent £7778 of pre-tax profit.

Every additional pound of pre-tax profit will suffer a 19p CT deduction, and the 25% Dividend Income Tax will reduce this to 60.75p in your pocket. That's almost equivalent to a 40% deduction, but if the company were to pay you salary instead (which would be taxed at

40%), don't forget that it would also have to pay 12.8% employer's NI on all but the first tranche approximately equal to the PA.

Hence every pound paid as salary would cost the company 1.128, and would leave you with 59p in your pocket, an effective tax rate of almost 48%.

"19% corporation tax is better than 22% income tax"

Oh no it's not. The choice is 22% if you pay all the profits as salary or

19% if the profits are left in the company plus 22% if and when they are paid as salary.

snipped-for-privacy@hotmail.com wrote:

OK, I've just realised I've boobed, and forgotten my personal tax allowance, so it's actually around 7k before I hit the higher tax bracket, but the question remains, what is the lowest "acceptable" salary for a director?

"Stickems." wrote

Hehehe - you've really got no idea, have you!

(1) He's talking about paying it as dividend, *not* salary (so 22% does not apply);

(2) If the profits had been left in the company and 19% CT paid, and then *later* paid out as salary, then the company would receive 19% corporation tax relief at that time (as salary is a legitimate business expense).

(1) He's talking about paying it as dividend, *not* salary (so 22% does not apply);

Since when are dividends not taxable?

For quite a long time, if you are a basic rate taxpayer.

"Tim" wrote

"Stickems." wrote

They may be taxable, but not at the 22% rate!

I can assure you, and Jonathan, that dividends are most definitely taxable. The rate is 20%.

"Stickems." wrote

Correct. I've never said that they're not.

"Stickems." wrote

Wrong again! Care to try any other rates? ;-)

The rate is 10%, but you don't have to actually pay any money to HMRC, subject to any additional Corporation tax on the now abolished non-corporate distribution rate.

Oops. Yes the rate is 10% deducted at source.

No it isn't deducted at source. It is neutralised by the built-in tax credit. It goes like this:

For every £100 of company profit, £19 corporation tax is due, and so the company has £81 left. If it gives this to the director/shareholder as a dividend, this £81 sum is *treated* as if it were a £90 dividend, on which 10% income tax is due (i.e. £9), and which is *treated* as already paid.

So the chap gets to keep the whole £81, provided he is not a higher-rate taxpayer. None of this £9 is actually deducted by anyone for remitting to HMRC, neither "at source" nor anywhere else.

If he *is* a HRTP, then the £90 is taxed at 32.5% (i.e. £29.25) of which as before £9 is treated as already paid. So the chap has to pay £20.25 income tax and keeps £60.75. (Effectively his £81 are taxed at 25%). This is not deducted at source, the chap has to pay it himself by the same deadline as submitting his tax return.

If he is a borderline HRTP, with £50 of the £90 being above the HR threshold and £40 below, then he pays nothing (10%-10%) on the first £40 and £11.25 (32.5%-10%) on the other £50.

Isn't our tax system quite ridiculously complex?

Nice one Ronald!

I bet the girls at parties *love* that explaination ;->

rgds, 'I recently explained to my 60-yo MIL what her tax code was, and why it had changed...'Alan

That must have taken no mean measure of patience. Award yourself two gold stars.

Nahh - as soon as I said that you multiply it by 10 to get the amount you can earn before paying tax, she understood it all...

rgds, Alan

What do you expect if you elect idiots?

Brown couldn't understand it so he proceeded to make it worse and then gave up!

He's actually forgotten a few things there. I will explain later when I have time.

It involves the words "Non corporate distribution"

Not forgotten, omitted as no longer relevant. A right proper carry-on that was.