The right wage

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The right wage

What’s the optimal salary level to extract cash from a limited company?

To arrive at the optimal salary level, firstly assume that a director’s personal allowance is available (£11,850 for 2018/19) without it being used up for pensions or other employment/rental/investment income.

Next, we consider if the employment allowance is available. This is the allowance that will reduce your employer’s secondary class 1 National Insurance (NI) each time you run your payroll, until the £3,000 is used up or the tax year ends.

If the sole employee of the company is also a director, the employment allowance is not available. Therefore, it would make most sense to pay a salary somewhere between the lower earnings limit and the primary and secondary National Insurance Contributions (NIC) threshold (between £6,032 and £8,424 for 2018/19). In this case, there will be no NI or PAYE to pay, but there will be notional NIC at zero rate that contribute towards state pension and benefits.

If the sole employee decides to pay themselves a salary of more than £8,424 then the NIC cost of 12% for the employee and 13.8% for the employer would outweigh any corporation tax saving (corporation tax is 19% for 2018/19).

If the employment allowance is available or the employee is under 21, a higher salary can be drawn as the employment allowance absorbs the NI cost – a salary of £11,850 (the 2018-19 personal allowance) in this case. The director will have to pay some employee NI, but this is more than offset by the corporation tax saving on salary paid above the primary threshold.

Where the director’s salary exceeds the personal allowance of £11,850 for 2018/19, the excess salary will attract tax at 20% and employee’s NI of 12%. Totalling 32% tax, this is greater than the 19% corporation tax saving on that extra salary paid.