One Person Director Shareholder Company – Optimal Salary 2015/16

Having just completed all the year-end returns for my PAYE clients I thought it was worth sharing my thoughts on the optimum salary for a one shareholder director company for the current financial year.

For the purposes of this exercise I am assuming that the director shareholder has no other income other than a salary from their company and additional income by way of dividends extracted from the company. Moreover, that they remain a basic rate taxpayer.

Two things to consider, firstly, the personal allowance of £10,600 and secondly, the employment allowance which gives employers a discount on their employer’s national insurance contributions. The allowance has to be claimed through RTI and is equal to the lower of £2,000 and the employer’s secondary class 1 national insurance cost for the year.  Most trading companies qualify for the employment allowance and so it is sensible to claim it.

In the above circumstances the optimum salary to take will be the full personal allowance which equates to £883.33 per month over the year. Further income is then taken as dividends (assuming sufficient reserves to accommodate the dividends) up to a maximum of £28,606 for the year. In this way the director shareholder remains a basic rate taxpayer and no actual tax will be payable on the dividends as the 10% tax liability is notional and offset by the associated tax credit.

This will result in the director paying employees’ primary class 1 of £304.80 but this is more than offset by the saving in corporation tax which is reduced by £508 giving an overall saving of £203.20. Without the employment allowance the employer’s NIC’s would be £343.34 (13.8% of £10,600 – £8,112).

Next time I will consider the position of the director shareholder with other sources of income to take into account.

Posted in PAYE at 2015-04-10 by Alan Ovenden