Readers questions: I’m in my first year of running my limited company, and I am the Director and only employee. I haven’t paid myself any salary in this tax year yet, because I earnt a salary in this tax year before I set up my business. My Limited Company will reach it’s one year anniversary in mid-May 2020. My question is, is it tax efficient to pay myself £8632 next financial year, and before mid-May when my Limited Company reaches its 1st anniversary, to minimise corporation tax payment?
Expert answer: The expert for this reader’s question is Helen Christopher from Orange Genie, who takes a look at the most tax-efficient way of paying a limited company director’s salary below.
Running a business in the first year needs planning to ensure that the business has the cash flow to manage the day to day running. The benefits of working via a limited company are that you can utilise the tax planning measures not available via other business structures (such as sole trader and umbrella companies).
Getting paid as a director of a limited company
As a sole director and employee of a business, it’s important to structure your salary and dividends in order to cover your outgoings without putting the business into financial difficulty to pay its liabilities.
Deciding whether to run a directors salary in the first year of the business depends on how much you have earned in the tax year to date. In this example, the company’s year straddles two tax years. When considering a salary it is important to review the amount earned in previous employment during 2019/20. If the director has earned over the personal allowance (£12,500 2019/20) in the tax year (to 5th April) prior to starting the business, then it may not be tax efficient to process a salary in the business as dividends are more tax effective from a personal perspective.
A salary can be processed from the 6th April 2020 and this will receive corporation tax relief on the full amount.
Reducing corporation tax payment
Is it tax efficient to pay yourself £8,632 before the company year-end to minimise corporation tax? If you pay the full salary of £8,632 in May 2020, you would receive full corporation tax relief in the month but you would pay excessive PAYE and NIC. Under payroll rules, HMRC would assume that the amount paid in May was representative of the monthly amount to be paid to you and accordingly tax and NIC would be deducted at higher rates PAYE (20/40%), Employees (12%) and Employers National Insurance (13.8%). Whilst PAYE may correct itself over future months or on a self-assessment, the excess NIC would be lost and so this approach is not tax efficient.
Paying yourself a salary of £8,632 over the course of the tax year 20/21 will be efficient, you will pay no income tax or National Insurance at all. Note dividend payments do not have any NIC attached to them.
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