The introduction of the NIC Employment Allowance last year added an extra dimension to remuneration planning for small limited companies. In a nutshell, employers can reduce the amount of National Insurance contributions they pay for their employees (more commonly known as Employers NIC) by up to £2000 per annum.
In years gone by, directors would tend to pay themselves at a level below both the tax and National Insurance thresholds, extracting anything further by way of dividend. However, with the EA now being a factor, it generally makes more sense to take a salary in line with the personal tax allowance. Although this approach will result in the director suffering a small NI deduction, the NI bill will be outweighed by the potential Corporation Tax saving.
As an example:
A gross salary of £10600 is paid. This amount is equal to the 2015/16 personal tax allowance meaning no income tax is due. There will however be 12% NI deducted on anything over £8060 which equates to £304.80. The key here though is the Corporation Tax saving of 20%. By paying the extra £2540 in salary (the difference between the NI limit of £8060 and the tax allowance of £10600), the company will save £508 in Corporation Tax. So, you’ve got a £508 CT saving for the company but a £304.80 NI deduction for the director, leaving you £203.20 better off overall.
You can earn a further £31785 in addition to the £10600 salary before moving into the higher rate tax bracket. For earnings purposes, dividends come with a notional tax credit of 10%. You therefore need to multiply £31785 by 0.9 to get the real cash value of the dividend you can physically pay yourself. £31785 x 0.9 is £28606 which is therefore the maximum dividend you can take, in addition to the £10600 salary, before moving into the higher rate tax bracket.
£10600 salary less £304.80 NI deductions (equivalent net value of £857.93 per month)
£28606 dividend (equivalent to £2384 per month)
The above assumes the director has no other income, the company has sufficient distributable profits to declare the dividend and the EA allowance is available