Our 5-minute read – Tax Tips – for UK doctors and dentists will help you save tax, get organised with your tax affairs and make sure you meet important deadlines with ease.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. The Financial Conduct Authority does not regulate tax advice.
As a director or shareholder of a limited company, you have a few options of how you can earn an income from your business. When deciding how you should structure your company, you’ll need to consider how much and what kind of tax you want to pay and how much you want to contribute to National Insurance (NI).
There are a few different options for you to explore to ensure you’re maximising your income whilst doing your citizen’s duty.
Every company will have different levels of profit and overhead costs, and each individual will have different income requirements that they need to maintain. It’s important to remember that a setup that works for one person won’t necessarily work for you.
Achieving an optimal salary is based on complicated equations which might be best handled by financial professionals. These are however, some loose guidelines to help get you started.
Employment Allowance Available
Achieving the optimal salary level will depend on whether or not a director has used their personal allowance, because this then affects the available employment allowance. This is set at £3,000 for the 2018/19 tax year and normally, Class 1 NICs would be payable at this level, so the allowance should protect the contributions. The availability of the employment allowance means you might be better off taking a higher salary.
If you also have the personal allowance (£11,850 for 2018/19) available then the smart decision is to take a salary in for the same amount, maximising the protection of earnings against tax and NI.
NIC will still be paid by the director because this salary exceeds the primary threshold (£8,424 for 2018/19), but there is no employer’s NIC because it is counterbalanced by the employee allowance.
It’s worth noting that the employment allowance is only available to companies with more than one employee and to companies with just one employee that is not the director.
No Employment Allowance
If you happen to run a one-man company and cannot take advantage of the employment allowance, then the best course of action is to ensure the director’s salary falls between the lower earnings limit and the primary and secondary NIC threshold. In this case, there will be no actual NIC due from the income earned when it falls between these two limits.
In this situation, the director of the company is considered to have paid notional contributions on their earnings between the lower and primary thresholds at a zero rate. This gives the impression that contributions are still being made, maintaining eligibility for state pensions and benefits.
While you won’t pay any tax as you earn (PAYE) you will need to complete a self-assessment tax return.
In a happy coincidence, the maximum amount you can earn without having to worry about unnecessary tax burdens is the same as the primary threshold – £8,424 for the 2018/19 tax year.
In general, if your salary is more than the personal allowance, you’ll pay tax at the basic rate of 20% and contribute NIC at 12%. The total of 32% is actually more than corporation tax, which is only 19%, so it is a good idea to thoroughly explore all your options before deciding on your salary income.
This, however, is just the tip of the iceberg. As mentioned, the actual calculations that go into concluding your salary are complex, and we’ve only highlighted important factors at a high level.
Working with a professional will ensure you have made the right decision for your company that allows you to retain as much of your hard earned cash as possible.