Owning a company means you can decide how much to pay yourself in salary, pension contributions, and what proportion of the profits to take as a dividend. Getting the split right is really important though as it makes a big difference to the tax and national insurance payable by both you and your company.
Assuming you have no other income, we’d normally recommend having a salary of £10,600 (personal allowance for 2015/16), which will be tax free. However, auto-enrolment rules state that a company with more than one employee (including directors) has to automatically enrol all employees receiving a salary over £10,000 (for 2015/16), to its company’s pension scheme.
On any salary over £8,060, you have to pay national insurance contributions (NIC) at 12%. So if the company pays you £10,600, NIC is charged on the extra £2,540 and you’ll take home £10,295. The company will also pay employer’s NIC of £343.34 (13.8%) on that salary. However, an employment allowance of £2,000 p.a. applies to most companies to set against NIC for all employees. This means the company won’t pay over NIC until the £2,000 allowance has been used up.
You could pay yourself a salary just below the NI threshold of £8,060, which would then generate a NI credit towards your state pension, but you won’t actually pay any tax or NI. However, unless you have other income, you’d then be ‘wasting’ £2,540 of your tax-free personal allowance. The NI credit will be attached to a dividend which also requires tax. A credit is worth 1/9th of the overall tax payable on the dividend.
Don’t forget that your company can also make contributions to your pension and receive a tax deduction for the cost. If you’re aged 55 or over, then from 6 April 2015 you‘ll be able to draw all of the funds from that scheme, but 75% of it will be taxable.
Taking money out of a pension scheme has complex and irreversible implications, so we recommend getting in touch with Paul Darley, our in-house chartered financial planner, before making any decisions concerning your pension.