We now have an updated guide for 2015-16 HERE.

If you trade through a Limited Company the real tax savings come through taking a low salary with the balance of any drawings in dividends.

For the 2013-14 tax year the basic level of salary for one shareholder / director companies was  advised to be £640 per month (rounded). This level of salary has two benefits:

  • It is below the relevant thresholds so no Employees or Employers National Insurance has to be paid
  • It is above the “Lower Earnings Limit” which means that although no National Insurance is paid it is still high enough to get you a “stamp” in your National Insurance book thereby protecting your entitlement to future state pension and benefits.

For 2014-15 the government have made things a bit more complicated as they have introduced something called the “Employment Allowance”. This is an initiative that allows most companies to be exempt from paying the first £2,000 of Employers National Insurance (but not Employees National Insurance).

This means that the Optimum salary level for the 2014-15 tax year (starting April 14) is higher, but brings with it some issues. We have outlined below two suggested options for your payroll for 2014-15

For these options we have assumed a basic situation where there is only one director / shareholder of the company and there are no other employment earnings outside of the company.

Option 1 – most tax efficient, but a bit more admin

Take a Gross Salary of £10,000 (£833.33 per month)

This is the standard tax free allowance for 14-15. Yours could be a bit lower if HMRC adjust your tax code for any reason. If that is the case then your salary should be reduced to your own personal allowance level, but for simplicity we will assume £10,000.

The overall tax savings at this level of salary compared to Option 2 discussed further down are £164. This is the corporation tax saving of £409 less
the Employees NI that has to be paid of £245. No Employers NI needs to be paid due to the Employment Allowance (assuming you are eligible for this).

On the admin side, you will need to pay some National Insurance to HMRC – if you forget there are potentially interest and fines which could outweigh the tax savings made.

There is also an additional benefit of this level of salary in that it allows a slightly higher combination of cash and dividends to be extracted before you hit the higher tax threshold. So for clients who like to take their salary and dividends right up to the higher tax threshold but then leave anything above this in their company, using a £10,000 salary would enable an additional £204 of salary and dividend to be taken out.

Option 2 – less tax efficient, but a bit simpler

Take a Gross Salary of £663 per month (or £660 rounded), miss out on the additional £164 of tax savings, but  it’s simpler to administer as there are no National Insurance payments to make to HMRC. You are still protecting your entitlement to future state pension and benefits at this level of salary. If you like to keep things simple then we recommend this level.

To see how much you can save through a Limited Company by taking a low salary and dividend mix compared to self-employment check out our article here.