Businesses (especially new businesses) often can’t afford to pay its directors. This can mean losing out on tax and NI advantages. Even whilst as the owner you are dipping into your own pockets to fund your new business venture you should still pay yourself a salary. There are compelling reasons why you should do just that, especially when this might not cost you a penny in tax or NI.
For every pound of salary your company pays you it will get a reduction from its Corporation Tax (CT) bill of at least 20p (the current small profits CT rate is 20%). And where the company makes a loss, the salary will increase this. The increased loss can be carried forward and set against later profits to reduce the CT bills in these years. But to receive this tax deduction your company will have to fund the salary.
If you're using your own capital to live off as well as fund the new business, you probably aren't using your annual tax and NI-free allowances. If that's the case, you can award yourself up to £7,228 for 2011/12 with no tax or NI to pay neither by you nor by your company.
So is there a way to achieve this without the company having to actually pay you?
Employees are treated as receiving their salary when it's paid to them, but directors are subject to special rules. These say that for tax and NI purposes they are treated as receiving salary as soon as the board approves it. But it doesn't actually have to be paid to the director. All you need to do is record in the company minutes that a salary has been approved, and add it to money the company owes you. So you've gained your company a CT deduction and increased the amount you can later take tax and NI-free.
Furthermore by awarding yourself a salary you'll get a credit to your state pension record. You need 30 years' worth to receive a full basic pension.
In summary it won't cost you or your company NI or tax where it awards you a salary of between £5,304 and £7,228 for 2011/12. The company will get a Corporation Tax deduction, and you'll receive a credit to your state pension record. But the company doesn't have to pay you the salary; it can owe it to you. Make sure you report it on the annual PAYE return.
