Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions (NIC), and in some cases 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 NIC contributions.
For 2018/19 the NIC rate is set at 0% for annual earnings in the range of £6,032 to £8,424 inclusive. Earnings in this band range qualify for NIC credit for state benefit purposes. At up to £116 per week (£6,032 p.a.) no NIC credit is obtained for state benefit purposes. At over £162.01 per week (£8,424 p.a.) employees’ NIC starts to be paid at the rate of 12%.
Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band that depends on the actual date appointed. Care needs to be taken in these circumstances not to incur an unexpected liability to pay NIC.
Directors resigning during the year still have the full annual earnings band quoted above, and so care is needed to ensure that earnings for the whole tax year are within the range of £6,032 to £8,424.
Careful planning is also required to ensure that any impact of the National Living Wage regulations is considered, this may be particularly important for women who would like to claim statutory maternity benefit at some future date.
Directors considering their planning options for the first time are advised to take professional advice when setting the most tax/NIC efficient salary. We, of course, would be delighted to help.