HB Accountants

March

Pay rises for company directors

For owner-managed companies it is still more tax efficient to draw out most of the profits by way of dividend. However, unless the director has other earnings it makes sense to draw at least a minimum amount as salary, because this will usually be covered by the personal tax allowance and will also ensure that the year qualifies as a contribution year towards the state pension, even if no national insurance contributions are actually paid. Also, unlike a dividend, salary will normally qualify for corporation tax relief.

For the year ended 5 April 2011 the optimum annual level of salary is £5,715. Above this level you and your company will have to pay national insurance at a combined rate of 23.8% on the excess. Below £5,044 per annum the year will not qualify for state pension.

With effect from 6 April 2011 the optimum salary level will increase to £7,072 per annum and above this level the combined national insurance cost will increase to 25.8% on the excess (the lower qualifying level also increases to £5,304 per annum).

Those directors who have been drawing salary at the rate of £475 per month can therefore increase this to £589 per month with effect from 6 April 2011.

One over-riding caution is that you can only claim corporation tax relief if you can show that the salary is commercially justified. This should not be a problem with a full-time working director but could be difficult to justify in the case of spouses or children who do only a small amount of occasional secretarial or similar work (or no work at all!) for the company.

There are also a couple of important procedural points. If the only remuneration paid to directors or family members is at or below £5,715 per annum for the year ended 5 April 2011 it will still be necessary to file an annual end of year return on form P35 so that the national insurance office can credit the year for state pension purposes. Also, HMRC have asked that nil returns are filed each month if no PAYE or NIC is payable and have suggested that they could try to charge penalties if this requirement is not complied with. If you expect to be in this situation please let us know and we will pass the information to HMRC to try to avoid having to comply with this irritating requirement.

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