Let’s start with the 2015/2016 annual personal allowance (ie the maximum amount of money that can be earned this tax year without paying any tax).
The limit this tax year is £10600 and it covers all types of income. It is just one allowance per year per individual. This means a maximum tax-free salary of £833.33 monthly.
In terms of National Insurance contributions (NI), the maximum you can take out without paying any national insurance is £8060. This represents a maximum NI-free monthly salary of £671.66.
Any annual earnings between £8060 and £10600 will incur NI but no tax. For example, if you draw the full £10600 this tax year, you will pay no tax but the Employers NI will be £343.34 and the Employees NI will be £304.80.
Luckily the Employers NI will be waived as it is covered by the £2000 Employment Allowance introduced in the 2014 Budget leaving just the Employees NI to cover.
To summarise, £671.66 monthly means nothing to pay.
£833.33 monthly means £304.80 to pay in Employees NI for the tax year.
Note, however, that the less salary you take, the more corporation tax your company pays AND since 2014 when the Employment Allowance was introduced, taking the lower salary has not been as beneficial as in previous years.
To illustrate, let’s look at a typical small limited company with two directors weighing up taking (the tax-free maximum of) £10600 against (the tax-free and NI-free maximum of) £8060:
|Each Director takes home||10600||8060|
|Total to HMRC||8370||8776|
The calculations clearly show that taking the higher amount is more beneficial and this is what I will be recommending to my clients as long there are no other factors involved.
Now, let’s look at the dividends that will supplement the low salaries:
The maximum that can be taken this year in salary and dividends without paying a penny in tax is £42385. So, if £10600 is already taken in salary, the maximum gross dividend must be £31785. Anything above that incurs a tax rate of 32.5% (minus the 10% tax credit).
(The above assumes that directors are also shareholders. The calculations and figures are for guidance only and might not suit your personal circumstances. For detailed tax advice, please get in touch with me.)