Avoiding Unnecessary PAYE and NI Payments: Minimum Salary £671.00 pcm
(From 6 April 2016)
Running a limited company is no more onerous than being a sole proprietor, as long as certain key rules are observed. These rules are simple, but perilous to ignore.
One of the main rules is that the director/proprietor cannot simply draw out of the company any amount he likes tax free (as if he were a sole proprietor taking drawings).
For a limited company, amounts drawn can only be represented by one of a number of concepts. Salary, dividends, repayments of loans being the main three types of payment.
To optimise tax, you need to balance these three carefully.
This leaflet is a brief summary as to how to ensure you stay on the right side of this simple rule of company law.
Minimum salary £671.00 pcm
From April 2016, unless you have a good reason not to (for example, you have other income, in which case please let us know and/or we have already told you otherwise), pay a monthly salary out of the company, to yourself, of £671.00 pcm (for 2016/17)
- Pay the £67100 regularly and monthly (unless your circumstances are unusual see below)
- Pay any further amounts out to yourself by way of dividend:
- If possible, pay dividend payments in irregular amounts and at irregular times – i.e. just the opposite of salary payments
- You may want to take less salary in certain circumstances, e.g. where you already have other earnings or pensions. If in doubt, please kindly make contact
- Clearly, this leaflet is no substitute for specific advice tailored to your situation, so if in doubt please ask.
- If the company owes you £ for out of pocket expenses, that is a separate matter: put in an expense claim and reimburse yourself (or else leave the bookkeeping to us at the year end).
What about my state pension?
- Paying the £671.00 pcm results in no tax and NI being paid, so the preservation of basic state pension (etc) is often of concern to clients.
- DON’T WORRY: you ARE paying NI contributions on that minimum salary – at 0%. Therefore your basic state pension is preserved.
- We are not experts in NI contributions and benefits: what follows is general advice only. The rules keep changing! (The definitions may change but our advice remains the same.)
- Qualifying years: Broadly, all you need for a full basic state pension (if you retire after 5/4/2010) is 30 qualifying years.
- Any year you pay yourself the £671.00 pcm (2016/17) counts as a qualifying year.
- What you SHOULD worry about instead is your overall pension provision when you retire: but that is a matter of getting proper advice from an IFA.
What about SERPS (now SSP?)
Only certain people qualify for the enhanced state pension scheme. You only qualify if you were previously employed and paid contracted out NI. Even then, the enhanced element of pension is dependent on various variable factors. Get specialist advice if need be from an IFA. (Independent Financial Adviser).
Should I pay more than £671.00 pcm to preserve my state pension?
- NO: paying more will run up PAYE and NI payroll costs and admin costs for no reward.
- Paying more will make no difference to the basic state pension entitlement, and is not really the answer for the very few people who contracted out and qualify for SERPS (now called SSP – the second state pension).
Worried about your basic state pension?
There is no need. You can easily check your entitlement by getting a state
pension forecast. Just complete the form (BR19 or similar) on www.thepensionservice.gov.uk or similar (links change all the time).