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Director salary of £22,449

Director salary of £22,449

With the employers allowance coming in, I've seen discussions talking about whether to take £7,956 or £10,000 as a salary. But was thinking, for a one band incorporated company, what about a salary of £22,449?

Way I see it, it would make full use of the £2,000 allowance and would reduce the CT liability (assuming small company) by £4,490. There would be income tax of £2,490 and employees NI of £1,739 but this would be offset by the CT saving.

I know the usual would be to take dividends but as they arent tax deductible and if only one employee (the director) then overal between the individual and the company this to me sounds like the most tax efficient option.

What do fellow AWeb members think?

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06th Mar 2014 12:09

The calculation you have done has a net tax reduction of £656 (ee's nic, PAYE - less corporation tax saving), whereas £10,000 has a net tax reduction of £1,811.  So in your example the client would fully use £2,000 from the government, but would pay more tax than when taking a salary of £10,000.

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06th Mar 2014 12:04

Even cheaper to go with £10,000

Anything over £10,000 and you're paying employees national insurance of 12%, which is a lot better than the old days of ~25% (Ees and Ers) but still a marginal "tax" rate of 12% on payroll levels over £10,000.  

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06th Mar 2014 12:37

Am I missing the point?

Bear with me while I work out the maths!

£(22,449 - 7,956) @ 13.8% = £2,000, so I agree that £22,449 utilises the whole of the Employment Allowance.

But how can taking a salary of £22,449 ever leave the individual with more than taking a salary of £10,000?  The PAYE tax cost of 20% is matched exactly by the CT saving on the same amount (as there is no Er's NIC) at 20%, but he has to pay Ee's NIC at 12% on any earnings over £10,000.

 

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By jaxx789
06th Mar 2014 12:50

Whilst they would be paying em-ee's NI of 12% they would be saving CT at 20%.

£10,000 - CT saving of £2,000

               Em-ee NI of £245

               NO EMPLOYERS NI

Therefore a tax saving of £1,755

£22,449 - CT saving of £4,490

               Em-ee NI of £1,739

              NO EMPLOYERS NI

              IT of £2,490

Therefore a tax saving of £261

Not sure where your figures cam from rjoconnor81.

Whilst I do appreciate the further tax saving in taking the £10,000 salary, imagine an individual where profit levels arent at a level where he's able to declare a sufficient dividend to pay one.

 

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By jaxx789
06th Mar 2014 12:54

Euan, what of people in a loss making company. Whilst there would be no CT saving they may not be able to live on £10k and wouldnt be able to withdraw dividends to bump their earnings up so may be their only option to actually receive a liveable income

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06th Mar 2014 12:57

Forgetting personal tax

What you are forgetting is that, once you get past the personal allowance, the continued CT saving on the gross salary is offset by the additional basic rate tax paid on the salary. Up to that point, the 20% saving on CT was greater than the 12% expense of Ees NIC. Once the CT and personal tax are offsetting one another, the Ees NIC becomes an additional tax on top, bringing your total tax saving down from about the £10,000 mark.

EDIT : I note that you are no longer talking about this as an across-the-board choice, but something potentially worthwhile for companies with low profits or losses. This is why running the figures on specific situations rather than taking a one-size-fits-all approach is always recommended.

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06th Mar 2014 13:01

I can see the rationale behind wanting to utilise the £2k employers allowance, but like Euan think the additional 12% em-ee NI tips the balance towards just taking £10k. I guess the optimising salary would only carry on with the normal thought process where its profitable and dividends could increase a directors earnings, so can also see jaxx's point.

I guess with this you can't just give a blanket answer for all directors as each case is different.

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06th Mar 2014 13:02

I calculated it on £22,499,

I calculated it on £22,499, instead of £22,449.  I agree that if there aren't profits to pay the dividend then higher salaries are sometimes needed (although if there are no profits then there might not be any cash to actually pay the salaries with), but your question states that you thought the £22,449 salary was the most tax efficient, which it isn't.  Also proved by your own calculations.  

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06th Mar 2014 13:20

Sausages...

... are definitely better than bananas.

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By Triggle
06th Mar 2014 13:26

Where does this belief that employees' NIC is payable once the salary is greater than £10k?

Isn't the primary threshold for 2014/2015 £153 a week = £7,956 a year and the 12% ers' NIC will kick in then?

Or have I missed something?

 

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06th Mar 2014 13:32

Some confusion

I think it is more a case of the Employee NIC being what causes the tax saving to drop once basic rate has kicked in. You will pay 12% NIC before £10,000, but if you are getting a CT saving of 20% up to that point then you are 8% ahead. Once basic rate tax kicks in, the 20% basic rate paid and the 20% basic rate saved cancel each other out. The ongoing Ees NIC is now not being offset at all, so could be considered an additional cost from this point for the sake of simplicity.

As always, I agree with Steve Kesby as well. Sausages are definitely better than bananas.

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06th Mar 2014 13:33

@ Triggle

You've only missed the fact that it's better to pay the 12% NIC all the while that the salary has the effect of transferring the individual's personal allowance to the company.

EDIT: stepurhan and I seem to have posted concurrently.

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17th Mar 2014 17:37

I'm in the £10K side of the room BUT....

am adamant that a banana will always win out over a sausage (dead flesh version)

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