Reminder Regarding Director's Salaries

24th March 2009

As you are aware, from September 2008 the personal allowance was increased by £600, allowing all Director's and employees to pay slightly less tax.  As a Director, this meant you had a pay increase from £452.92 per month to £502.50 per month without paying any income tax.  But, the National Insurance allowances stayed at the same level (unlike Income Tax) at £453 per month.

So what does this mean?

If you have increased your salary to £502.50 to maximise your tax efficiency, then now(March 2009) you will have National Insurance contributions due. This will amount to £55.27, resulting in a take home pay of £447.23 in March 2009.

Your limited company will also incur Employer's National Insurance.  This means that your limited company (as your employer) will need to pay HMRC £64.32. This is deductible from your Corporation tax.  So in total you will need to pay HMRC £119.59 by 19/04/09.

You still save money and reduce your tax bills by paying yourself the £502.50 and also paying the National Insurance (see sum below):

Cost to your limited company = your salary + employer's NI

= £6030 + £64.32

= £6094.32

Therefore, saving in Corporation Tax (21%) = £1279.81

Your earnings = your salary - employee's NI

= £6030 - £55.27

= £5974.73

If however you do not wish to maximise your personal tax allowance, you can reduce your monthly salary by £50 again in order to avoid paying the National Insurance.  But it will cost you more in tax (see sum below).

Cost to your limited company = your salary

= £5435.00

Therefore, saving in Corporation Tax (21%) = £1141.35

Your earnings = your salary

= £5435.00

As you can see, you will have to pay an extra £119.59 in National Insurance with the increased salary, but you will have an extra £539.73 (tax free) straight into your back pocket. You will also save your company £138.46 in Corporation Tax, all in all saving yourself £678.19 in return for the £119.59 National Insurance.

So this is why all of a sudden in your March 2009 salary you have deductions!