Many director shareholders take a minimum salary and any balance of remuneration as dividends. This tends to reduce National Insurance Contributions, and in some case Income Tax.
The planning strategy is to pay a salary at a level that qualifies the director for State benefits, including the State Pension, but does not involve payment of any NI contributions.
For 2017/18 the NI contribution rate is set at 0% for annual earnings in the range of £5,876 to £8,164 inclusive. Earnings in this band range qualify for NIC credit for State benefit purposes. At £112.99 per week (£5,875 p.a.) no NI credit is obtained for State benefit purposes. At £157.01 plus per week (£8165 p.a.) NI contributions start to be paid at the rate of 12%.
Directors, who are first appointed during a tax year, are only entitled to a pro rata annual earnings band which depends on the actual date appointed. Care needs to be taken in these circumstances not to incur an unexpected liability to pay NIC.
Directors resigning during the year still have the full annual earnings band quoted above, and so care is needed to ensure that earnings for the whole tax year are within the range of £5,876 to £8,164.
Directors considering their planning options for the first time are advised to take professional advice as there are a number of considerations to take into account when setting the most tax/NI efficient salary. We, of course, would be delighted to help.