How much should we pay ourselves?

[Early Retirement]

My husband and I have set up a limited company, and are the sole employees (both directors). Initially for cash flow purposes we will not take a salary, but will simply accrue our salaries each month in the company books, to take at a later date when cash flow is stronger.

We are now wondering how much to pay ourselves so as to (a) minimise e'er and e'ee NICs, and (b) minimise our taxable income as individuals under self assessment.

I already have income from another source (rental income on BTL property) so I am inclined to take no salary from the company at all, as my annual tax free allowance is already soaked up by that, and so by taking no salary from the company, not only am I helping the company's cashflow, but I am not incurring e'er and e'ee NICs (I am not worried about not contributing NICs to my state pension, which I reckon is going to be worthless when we retire in 30 years).

My husband, however, has no alternative income and so we are wondering what salary he should take from a tax minimisation viewpoint. He could take:
(a) not more than £82 per week, so as not to hit the lower earnings limit, and thus not have to pay e'ee NICs (nor income tax); or
(b) not more than £94 per week (being 1/52 of £4,895, the current annual personal tax allowance), so that a small amount of NICs would be payable, but no income tax.

(A side question arising from the above would be, would my husband then be breaching minimum wage rules? Can you opt out of these rules?).

What are your thoughts? I am aware there are slightly different NI rules for directors. Are our facts straight here? I appreciate that many of you are probably thinking "but how can you live on such a small sum each week", but this scenario is purely for the first few months/year of the business where we want to keep our cash flow as healthy as possible whilst at the same time minimising the tax we have to pay.

Any comments gratefully received - many thanks.

[deanshepherd]

I would suggest, from a tax minimisation point of view, to pay both of you a salary equal to your personal allowance (£4,895 for 2005/06) and any additional funds you need to withdraw from the company in the form of dividends.

In answer to some of your points raised:

There is no NIC on hitting the lower earnings limit of £82 per week. This is merely the level at which you accrue state benefits entitlement. The NIC only hits after exceeding your personal allowance (or £94 per week).

As well as state pension entitlement you also get entitlement to other benefits which although you may not appreciate, now it is certainly worth doing in case the unforseeable happens, particularly as it will cost you nothing in NIC.

Minimum wage regs do not apply to directors unless they have an explicit contract of employment, which as owner/managers I suspect you do not have.

Even though you have rental income I would still suggest paying you up to your personal allowance to accrue state benefits. The rental income is NIC free anyway.


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accountancy
www.mmi-online.co.uk