What is a tax efficient salary?
Don’t pay more tax and national insurance than you need to
If you run your own company what is the best way to get paid.
When you work through your own limited company it is accepted best practice to take a small salary and extract the rest of the money due to you, after business expenses, as dividend.
If you are taking all or a large part of your money out as salary you are probably paying more tax and national insurance (NI) than you need to.
Because everybody’s circumstances are different, Anytime would always advise you on an individual basis. However let’s assume for illustrative purposes that you have no other income than through your own company.
Your income comes through your business so you have to extract the income from your company in a tax (and NI) efficient way. Nobody has to pay any more than the minimum due. There is a very famous statement from an early tax case, that still stands good today:
“No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.” (1)
Our recommendation would be for you to draw a salary for the 2018/19 tax year at the rate of £660 per month. That is well below the annual personal tax allowance of £11,850 so there will not be any tax to pay.
More importantly it is below the NI primary threshold, which means you do not have to pay any NI. BUT, it is above the NI lower earnings limit (LEL). Therefore even though you are not making any NI contributions, because you are nevertheless taking a salary above the LEL your basic entitlement to state benefits are still protected.
There is no benefit to be gained by taking a higher salary and paying “a bit of tax and national insurance”. This would not increase your benefit entitlement. It will also not make any difference to the way HMRC regard you.
This is not tax or NI avoidance. It is simple common sense and good basic tax planning.
For further advice existing clients email us at support@anytime.uk.com or call 03333 110 230
For new enquiries contact us now
(1)Lord Clyde in Ayrshire Pullman v CIR (1929) 14TC754
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