Advice on setting salary level

[ian2013]

Hi,

I need some advice on setting salary level for the year 2016/2017.

I contract through my own ltd company and my partner has 30% company shares (but she is not an employee so I'm effectively one man band). I have been paying myself a salary of £14000 for the last few years and draw the rest in dividend. The only other income is bank saving interest (a hundred pound at most). My accountant recently suggested me to move to a salary level of £11000 saying that it will be more tax efficient as I don't have to pay any income tax. But I read that I can also take a salary of £8,060 which means I don't have to pay any tax or national insurance at all. However if I do take a salary of £11000 as my accountant suggested, then given I won't be able to have any Employment Allowance from this year, so I will have to pay both employer's and employee's NIC (£750 in total, though with the savings on corporation tax, the net loss is less) which means I will be worse off. I'd like to know if my accountant's suggestion has any merits? If I take a salary of £8060 (against my accountant's advice), will it affect my state pension or making volunteering contribution to my pension given I pay no national insurance? Any other potential pitfalls?

Thanks in advance.

Ian

[kaiser78]

Hi,

I need some advice on setting salary level for the year 2016/2017.

I contract through my own ltd company and my partner has 30% company shares (but she is not an employee so I'm effectively one man band). I have been paying myself a salary of £14000 for the last few years and draw the rest in dividend. The only other income is bank saving interest (a hundred pound at most). My accountant recently suggested me to move to a salary level of £11000 saying that it will be more tax efficient as I don't have to pay any income tax. But I read that I can also take a salary of £8,060 which means I don't have to pay any tax or national insurance at all. However if I do take a salary of £11000 as my accountant suggested, then given I won't be able to have any Employment Allowance from this year, so I will have to pay both employer's and employee's NIC (£750 in total, though with the savings on corporation tax, the net loss is less) which means I will be worse off. I'd like to know if my accountant's suggestion has any merits? If I take a salary of £8060 (against my accountant's advice), will it affect my state pension or making volunteering contribution to my pension given I pay no national insurance? Any other potential pitfalls?

Thanks in advance.

Ian

The £11000 salary threshold relates to if there are 2 or more directors in the ltd company. If there is only 1 director then the salary threshold should be £8060.

[TheCyclingProgrammer]

If you reduce your salary to £8060 then there won't be any employers NI so the employers allowance becomes irrelevant.

Not sure why you've been paying a salary for £14k all this time unless you just like paying more tax.

FWIW my accountant's advice was to pay £8040 (£670/month). This would result in no NI being payable but would count as a qualifying year thus preserving your entitlement to state pension and benefits.

The other thing to consider is your overall take-home. As you're not the sole shareholder, increasing your salary reduces the dividends you can take before hitting the higher rate threshold which in turn reduces the dividends paid out to other shareholders.

Its possible that you could make your partner a director or company secretary and pay them a small salary and then be eligible for the employers allowance - I'm not sure what the current situation is on that as the legislation and HMRC guidance don't tally.

For an easy life I'd stick with a salary of £8040 (or £8060, whatever) and take the rest of your income as dividends.

[Maslins]

Where clients don't qualify for the employment allowance (ie the ones with just one person on the payroll) then ours are taking £671/month, so £8,052/year. Barring rounding, same as others above.

Tends to be the most tax efficient salary, and also convenient, as you don't have to worry about PAYE/NICs at all. Still counts as a qualifying year towards basic state pension though.

[kaiser78]

£8060 salary for 1 director setup and £11000 for 2 or more, no ?

[missinggreenfields]

£8060 salary for 1 director setup and £11000 for 2 or more, no ?

Only if you are claiming the employment allowance. Some people don't think they are eligible, even if they are, so don't claim it.

So - £8060 if you're not claiming it, £11000 if you are.

[DallasDad]

OP once you have digested the above info go and read this thread so you better understand the dividend changes this year

http://forums.contractoruk.com/accou...t-realise.html

Then go and ask for tax planning advice from your accountant and compare.
If things don't stack up consider talking a bit more seriously to one of the specialist contractor accountants here.

Taking a salary of £14K seems a rather odd number.
Did you do that through personal choice or from previous advice?

[AMS Accountants]

Most tax efficient salary

Hi,

I need some advice on setting salary level for the year 2016/2017.

I contract through my own ltd company and my partner has 30% company shares (but she is not an employee so I'm effectively one man band). I have been paying myself a salary of £14000 for the last few years and draw the rest in dividend. The only other income is bank saving interest (a hundred pound at most). My accountant recently suggested me to move to a salary level of £11000 saying that it will be more tax efficient as I don't have to pay any income tax. But I read that I can also take a salary of £8,060 which means I don't have to pay any tax or national insurance at all. However if I do take a salary of £11000 as my accountant suggested, then given I won't be able to have any Employment Allowance from this year, so I will have to pay both employer's and employee's NIC (£750 in total, though with the savings on corporation tax, the net loss is less) which means I will be worse off. I'd like to know if my accountant's suggestion has any merits? If I take a salary of £8060 (against my accountant's advice), will it affect my state pension or making volunteering contribution to my pension given I pay no national insurance? Any other potential pitfalls?

Thanks in advance.

Ian

Best salary for 2016/17 is £8,164 (£157 a week). This generates a small employee NI bill of around £13 and entitles you to state benefits.

Last year it used to be £10,600 but HMRC have scraped the employers allowance of £2k for sole director companies.

[WordIsBond]

Hi, Ian. Well-constructed post, most people who ask this question don't mention other income. It's clear you've got a pretty good handle on the issues. A few specifics:

1. Yes, your accountant's advice would cost you a few quid, but not very much. Yes, you'll pay 13.8% employer contribution on about £300 if you take a salary of £11K. You'll also pay 12% employee NI. On the flip side, you reduce company profit by about £3.4K (£3K extra salary plus about £400 employer NI), so you save around £680 in corporation tax, which virtually negates the impact of the extra NI payments.
2. An additional drawback is that you then have to make regular PAYE payments, which would be unnecessary if you use a salary of £8060.
3. State pension eligibility is based on annual earnings around £5600 (don't remember the exact amount, you can google it), so that is irrelevant to this question.
4. One other factor to consider is if you have any Benefits-in-Kind, that would definitely point towards the lower salary. I'll elaborate below.
5. Your personal contributions to a pension would be limited to the amount of your salary. However, in most cases it is going to be more efficient for contributions to a pension to be made by your company (since doing so reduces profit and so saves on corporation tax) rather than by you personally. If that is done, your company can contribute £40K / year, at least for now (that may change in future). So if you use company pension contributions to build your pension fund, salary level is irrelevant.

If it were me, I'd be asking my accountant why he recommends £11K instead of £8K, since it costs extra taxes and the extra hassle of PAYE, and if the answer weren't satisfactory, I'd be thinking this accountant doesn't know enough for me to trust him in future, and be moving. It is hard for me to think of any satisfactory answer an accountant could give.

Benefits-in-Kind. Suppose you are on a health kick, and have private medical insurance and a gym membership. Without going into all the details, because I don't have time and because your accountant can and should do this for you, it can be more tax efficient to have your company pay these for you, as a Benefit in Kind, rather than for you to pay them out of your personal income (which is after corporation tax and dividend tax have been paid). But I believe the tax efficiency is completely lost if you have a salary of £11K rather than £8K, because then there is not only employers NI to be paid, but also personal income tax at 20% on the BIK, and those combine to be greater than the 20% corporation tax and the dividend tax. If your salary is £8K, you don't have any income tax on the BIK (as long as it doesn't breach the £11K threshold), and so the only tax due is employers NI, which is less than the combined corp tax/div tax which would have to be paid if you pay it personally.

So if you are paying for anything that could be treated as a BIK and your accountant hasn't asked you about this and moved you to paying it through the company, then once again, maybe you need to think about another accountant. But if you do have any BIKs, and he is still recommending £11K salary, time to contact somebody who has a brain to go with the title "accountant."

[ian2013]

Many thanks to you all for the information and advice. The salary of £14k was suggested by my accountant a few years ago when I first switched to contracting from permanent employment. The accountant was recommended to me by a friend. I didn't know much and haven't paid much attention to it until now. Now he is suggesting me to move to £11k, so I did some research and found the £8k proposal. When I asked him about it, he said that he'd suggest his clients to make national insurance contribution to qualify for state benefits. Now I'm thinking whether he knows enough to be a competent accountant.

One more question is that: I've been paying myself £14k for the last few years, now if I drop to £8060, will that attract unwanted attention from HMRC as I'm taking a big pay cut and pay virtual no tax to them?

Ian