Do you work for a family company? Do you want to know what the most tax-efficient salary is? To find out more details please continue to read below.
What do I need to know?
If you own a family company, then you should be aware that you can extract profits in the form of a salary.
You should pay yourself a salary that is equal to or above the lower earnings limit for national insurance as this will ensure that it will be a qualifying year.
You should know that since 6 April 2019, there have been new tax rates and allowances that have come into effect when applying for the 2019/20 tax year.
This will have an impact on the optimal salary calculation for family and personal companies, as the optimum salary depends upon whether National Insurance employment allowance is available.
Am I entitled to Employment allowance?
If you are a director of a company and the sole employee, then you are unable to benefit from employment allowance.
If this is the case for you, then this means that the optimal salary for 2019/20 would be equal to the primary and secondary threshold, which is set at £8,632.
If you are using the director’s personal allowance which is £12,500, then you will not have to pay any tax and employees or employers National Insurance.
However, this will mean that the salary will be above the lower earnings limit of £6,136, so it will provide a qualifying year for state pension.
If you do not have 35 qualifying years, then you will not qualify for a single-tier state pension.
What should I do with my Employment allowance?
Employee’s National Insurance is payable if the salary exceeds the threshold of £8,632.
Therefore, you should pay a salary that is equal to the personal allowance, as employment allowance is available at £3,000 to protect the employers NI that would arise if the salary exceeds £8,632.
If employment allowance is available, then paying a salary that is equal to the personal allowance of £12,500 will allow for more profit, than paying a salary that is equal to the primary threshold of £8,632.
But if the director chooses to have a higher personal allowance due to receiving the marriage allowance, then the best salary would be equal to the higher personal allowance.
What if the director is under 21?
If the director of the company is under 21, then the best salary would be equal to the personal allowance of £12,500.
You should be aware that no employer National Insurance is payable on employees or directors’ earnings if they are under 21.
However, once their earnings are over the upper secondary threshold of £50,000 for under 21’s in 2019/20, they will have to pay employer National Insurance and employer contributions.
Is it worth paying a salary above the personal allowance?
You should be aware that it is not worth paying a higher salary over the personal allowance, as the increase in salary would be taxed, which will outweigh the corporation tax savings available.
You should make sure that you are aware of what the most-efficient tax saving salary is for each family member.
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