Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NICs), and in some case income tax. The planning strategy is to pay a salary at a level that qualifies the director for State benefits, including the State Pension, but does not involve payment of any NICs.
For 2017/18, the NIC rate is set at 0% for annual earnings in the range of £5,876 to £8,164 inclusive. Earnings in this band range qualify for NIC credit for State benefit purposes. At £112.99 per week (£5,875 p.a.) no NI credit is obtained for State benefit purposes. At £157.01 plus per week (£8,165 p.a.) NI contributions start to be paid at the rate of 12%.
Based on the above considerations it will generally benefit director shareholders of small companies to pay themselves an annual salary of £8,164 for 2017-18 – thereby securing credits for State benefits but avoiding any NIC charge – and take any balance of their annual remuneration package as dividends. In certain circumstances, taking a lower salary, but staying within the £5,876 to £8,164 band, would be equally effective. Fixing an appropriate salary level should be decided by considering all the factors that influence liability for a particular taxpayer.
Other points that directors should be aware:
Directors considering their planning options for the first time are advised to take professional advice as there are a number of considerations to take into account when setting the most tax/NI efficient salary. We, of course, would be delighted to help.