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"What is the best mix of salary and dividends" is a question often asked by new limited company (PSC) contractors. Before you look at what the optimum salary vs dividends solution is for most PSC’s, we recommend that you read our 'Understanding Dividends' guide first.
However, for those of you who are already well versed on the topic, this guide will explain the advantages to being paid in this way and what you should consider when determining the optimum mix of salary vs dividends.
Apart from the fact that there is no Corporation Tax relief on dividends (unlike a salary), being paid a salary above the Lower Earnings Level of £520 pm ensures that the individual will get National Insurance ‘credits’ providing entitlement to basic state benefits. If that salary is also below the Primary threshold for NICs of £792, there are also no employer NICs payable.
Personal financial circumstances are different for each contractor, but the majority find it most tax efficient to pay themselves a mix of both salary and dividends.
For the 2020/21 tax year PayStream believes that the optimum combination is a salary of £185 per week or £790 per month.
This is above the Lower Earnings Level which a contractor needs to preserve basic state benefits but is lower than the point at which they will incur both employee’s NIC and their PSC will incur employer’s NIC.
Corporation Tax relief is available on the full salary but once the salary is above the Primary threshold for NICs the total contributions payable exceeds the Corporation Tax relief.
Yes. In that case the most tax efficient salary would be £12,500 per annum because the employer’s NIC would not be payable.
Of course, every limited company contractor’s personal circumstances are different and if you feel you need some further advice about how best to set your salary please contact your dedicated limited company accounts team by email or on 0161 923 0201.