Optimum directors salary explained 2019/20

The Autumn Budget 2018 announced changes to tax and national insurance limits. What do you need to know to prepare for the 2019/20 payroll year?

Tax Code changes

The personal allowance has increased. For 2019/20, it will rise by £650 to £12,500 from 6th April 2019. Unless you receive an amended tax code notification, all “L” suffix codes will need to increase by 65 for 2019/20, e.g. code 1185L becomes 1250L.

Optimum director shareholder salaries and dividends

If the directors in your company are also shareholders and receive remuneration in the form of a minimum salary and dividends, then what’s their optimum salary/dividend package in 2019/20?

Assuming:

(1) they don’t have an employment contract so the national minimum wage doesn’t apply;

(2) your annual employers’ NI bill is already more than £3,000, so you will have fully utilised the employment allowance; and

(3) they have not yet accrued maximum entitlement to the state pension, then the sweet-spot is to go up to the NI threshold but no higher.

So for 2019/20, this would be a monthly gross salary of £719 which takes them up to the NI threshold. With regards to dividends, if the director shareholders want to go up to the basic rate limit (£37,500 for 2019/20) but no further, assuming they have no other income, they can receive dividends of £41,372 for the tax year (£3,447 a month) on which they’ll have to pay personal tax of £2,662.50 by 31st January 2021.

 

To summarize, add 65 to any tax code ending in L. Director shareholders not bound by minimum wage requirements can receive a salary of £719 per month tax and NI free and up to £3,447 per month in dividends.

For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.

Companies999 are Chartered Certified Accountants and Birmingham’s Best Company Formation Agent.

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Tax Codes Explained 2019

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