It should be pointed out that the information contained in this article is for the use of Directors and payroll administrators that are based in the United Kingdom of Great Britain or are working within the tax requirements of the UK
With the arrival of the new tax year there is also an increase to the optimum salary that Directors should pay themselves to remain tax efficient in the way that they extract remuneration from their own companies.
For some years now Director of UK based limited companies that are self owned have been able to take their remuneration in a very tax efficient manner, whilst at the same time still qualifying for the long term pension benefits acquired through National Insurance contributions.
As long as the salary paid to the Director is above the lower earnings limit (2012-2013 £5,546) then the Director will be shown to have made a contribution for National Insurance purposes for that year. If the Director takes a salary up to or less than the secondary threshold for National Insurance purposes (2012-2013 £7,488) then no actual National Insurance or Income Tax will be payable.
The optimum salary recommended by accountants for Directors who own the shares in their own company is £624 per month. This salary should be paid through a payroll system and the Limited Company properly registered as an employer with HMRC, the salary is disclosed when the yearend p35 submission is made by the company to HMRC.
This may all sound a little bit confusing; however it is sound advice if you are a contractor, freelancer or family Director who operates through a limited Company.
Even with the best financial planning a salary of £624 per month is not going to go very far, that is why your monthly payroll will be topped up by dividends paid by your company out of the profits that it makes.
A dividend is a payment per share that the company will make to all of its shareholders one or more times a year to distribute the profits after tax that the company has made through its trading. As dividends can only be paid when there are profits to pay them it is normally the case that a company will pay interim dividends throughout the year and a final dividend at the end of the year once the accountants have calculated the profits and tax payable. This means that the company can be confident that it is not overpaying dividends to its shareholders that are not covered by profits; this of course would be illegal.
However in the case of small companies this profit is much easier to estimate, it is usual for a regular dividend to be taken each month in addition to the Director Salary and this dividend to be topped up at the yearend once the final figures are drawn up.
This method of salary and dividends slows the owner Director of the limited Company to extract their remuneration in the most tax efficient way, it also requires the companies payroll services provider and their accountants need to work together to ensure the best outcome for the Client.
Philip Gurnhill is well known in the UK payroll services Industry, in addition to being a qualified accountant he has managed and written about payroll for over 20 years. He has now launched Indigo Payroll Services a payroll company dedicated to making life simple. To find out how little this service would cost your business, just enter the number of staff you employ on the instant quote tool at http://www.indigo-payrollservices.co.uk/ the results will be sent direct to your inbox.
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