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If you're currently a director taking a salary from your limited company, you'll need to be aware of the changes that are coming up.
Currently, most limited company directors will be taking £9,100 per year (or £758.33 per month) as a salary, with any further earnings being taken as a dividend. The reason for this very specific amount is that this is the maximum salary you can take without incurring any personal tax or national insurance charges, and your company also doesn't need to pay any employer's national insurance.
This amount also gives you national insurance credits without actually needing to pay any national insurance, which go towards your state pension.
Starting April 2025, this threshold will be lowered from £9,100 to £5,000. This means that any salary amounts you take from your company in excess of £5,000 will be subject to employer's national insurance, at a rate of 15% (this is up from 13.8% last year). Therefore, we'd strongly recommend reviewing your director's salary as failure to do so could land you with an unexpected employer's national insurance charge.
We've run some calculations based on some recommended salary amounts, so you don't have to...
Option 1: Salary of £5,000 per year
Employer's national insurance payable: £Nil, within the threshold
Corporation tax savings: £950.00
Net tax savings: £950.00
NO national insurance tax credits received
Option 2: Salary of £6,500 per year
Employer's national insurance payable: £225.00
Corporation tax savings: £1,277.75
Net tax savings: £1,052.75
National insurance tax credits received
Option 3: Salary of £9,100 per year
Employer's national insurance payable: £615.00
Corporation tax savings: £1,845.85
Net tax savings: £1,230.85
National insurance tax credits received
Option 4: Salary of £12,570 per year
Employer's national insurance payable: £1,135.50
Corporation tax savings: £2,604.05
Net tax savings: £1,468.55
National insurance tax credits received
We'd recommend either option 2, 3 or 4. This is because all these amounts will give you credits for national insurance.
Option 1 will not give you any national insurance credits, however if you're not too fussed by this, this is the cheapest option because you won't need to pay any employer's national insurance (NI) to HMRC.
That being said, whilst options 2, 3 and 4 all require you to pay NI, the overall corporation tax savings do become even greater. Based on tax savings, option 4 will give you the most amount of corporation tax relief.
If receiving national insurance credits whilst paying as little NI as possible is most important to you, then option 2 may be most suitable.
Companies with two or more directors/employees
Two or more people on payroll? Fantastic! This means you should be eligible to claim employment allowance, which means you don't have to pay the first £10,500 of your employer's national insurance. Therefore, a higher salary may be better for you.
Need help?
We'd love to help with your limited company - feel free to contact us to book a no-obligation virtual coffee.
*This blog post does not constitute financial advice in any way and is not personalised to your situation. For personalised advice, please contact us.
*Info is correct as of the day this blog was posted.