Many small business owners ask this question, typically they are a sole director and share holder and want to decide from a tax and NI perspective what the optimum salary is (the rest of their income coming from dividends).

The new lower earning threshold for National Insurance is £5,824 per year (£112 per week) for 2015-16, there is an advantage to paying above this level so that you will earn credits towards a state pension. Its expected in current terms that a years credit is worth £225 pension per year for life. Employees start paying NI when earnings are above £155 per week)

The Employment Allowance of £2,000 has been continued into 2015-16 which means you won’t have to pay any employer National Insurance contributions at all if you usually pay less than £2,000 a year.

The personal tax free allowance for 2015-16 is £10,600.

So assuming you aren’t a higher rate tax payer and you haven’t used up the employment allowance on other staff, £10,600 would be the optimum salary because:

Saved Corporation Tax at 20% = £2,120

Employee NI 12% on (£10,600 – £155 x52) = (£304.80)

Saving £1,815.20

Beyond this point income tax is payable at 20%

steve@bicknells.net