In May 2014 my colleague David Robinson wrote an extremely popular blog entitled 'Is £10,000 the most tax efficient salary for directors?’ which examined the way in which directors should remunerate themselves from their family company. In the blog, it was identified that a director could receive an additional £164 without any additional cost to the company. Better still, a further six directors could each achieve the same benefit.
That original blog explored the position which was relevant for the tax year 2014/15. With the increase in allowances, as well as new announcements made in the Budget in March 2015, I now re-examine whether the £10,000 salary remains the best approach.
What you’ll discover is that I believe it will be possible to increase the amount extracted by in excess of £1,500 with planning at no additional cost to the company.
Typical Profit extraction planning pre April 2014
It was common practice for many small family companies to pay low salaries to the director/shareholders that saved national insurance. This was typically £7,956 and was below national minimum wage which doesn’t apply to directors.
Typical Profit extraction planning in 2014/15
As noted above, it was possible in 2014/15 to increase the amount paid to a director by £164 through an increase in their salary to £10,000. This approach took full advantage of the personal allowance which would previously have been partly wasted. It also relied on the £2,000 Employment Allowance that was introduced from 6 April 2014.
Using this approach in 2015/16 will result in an increase of £203 to each director. A typical husband and wife company could save £406 if it has no other employees. If there were two children who were also directors, the savings would be £812.
Profit extraction planning 2015/16
With the same cost to the company as both the above it is possible using current legislation to save in excess of £1,300 over the 2014/15 planning approach and in excess of £1,500 over the pre 2014 approach. These figures are per director.
In order to achieve this level of saving it is necessary to have a credit director’s loan account exceeding £50,000. However, smaller savings are also possible where loan accounts are held at a lower value.
The election on 7 May 2015 could affect this planning and you should always consult a tax specialist before deciding on the best approach for your company as there are many factors aside from tax you should take into account.
If you would like to discuss this planning opportunity further please do not hesitate to contact us.
If you would like to discuss this planning opportunity further please do not hesitate to contact us.
