Appointing Another Director to Help Your Company Become More Tax Efficient

If you operate a limited company in the UK, you’ll want to ensure you’re doing it in the most tax-efficient way possible. This includes thinking about paying yourself from the business, and whether it’s a good idea to recruit another director to work in your company with you.

Whether it be a family member or someone else, we’ll dive into the benefits of hiring another person to help your business be more tax efficient.

How can another director benefit my limited company?

Being both a director and shareholder in your own limited company means you have options about how you pay yourself in order to be as tax efficient as possible. For most people this means taking a salary which is at the National Insurance threshold (so you won’t need to pay NI) and then taking the rest of your income as a dividend (because they’re not subject to NI anyway).

The point at which you start paying National Insurance is:

£5,000 for employers
£12,570 for employees

The good news is that some people can take a salary of £12,570, and they still won’t pay NI as an employer thanks to the Employment Allowance. This allowance reduces the amount of Class 1 NI contributions eligible employers need to make by up to £10,500 each year.

The thing is, being the only director and employee in the company means you aren’t eligible. But if you add someone else to the payroll, then you are.

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Taking a director’s salary and managing National Insurance

If you’re a director and you’re trying to manage how much National Insurance you pay, then the amount of salary you take is very important.

For example

Let’s say a sole director decides to pay themselves a salary of £12,570 per tax year.

They won’t pay NI as an employee because their salary is at the Lower Earnings Limit.

But they are not eligible to claim the Employment Allowance.

Which means they’ll pay £1,135.50 in employers’ National Insurance.

If the company has another director or an employee, it is eligible for the Employment Allowance.

This would mean they wouldn’t have to pay employers’ National Insurance contributions as long as the company’s total bill is below £10,500 for the year, and they don’t pay employee NI as an individual either.

It reduces your company’s bill for Corporation Tax too

As a limited company you only pay Corporation Tax on your profits. Deducting any allowable expenses, such as salaries, reduces how much tax the company will need to pay.

For example

Let’s say you’re taking a salary of £12,570, and your taxable profit before hiring is £50,000.

Your company will be taxed at 19%.

£50,000 x 19% = £9,500 in Corporation Tax.

You take on another director, and pay them a salary of £12,570.

You can claim the Employment Allowance, so there isn’t any employer NI to pay.

Your taxable profit would now be £38,565.

£38,565 x 19% = £7,327.35 in Corporation Tax.

Making a family member a company director

In the example above, your company takes on another person, and this reduces your company’s tax bill by more than £2,100. You can also pay yourself a higher salary, going from £5,000 to £12,570, without paying any extra income tax or NI thanks to the Employment Allowance you can now claim.

Although the company now has the cost of paying someone else, so there’s less left in the pot for dividends.

But this might still be useful if they’re someone you already support financially, such as a spouse or child, and they don’t have any other income.

Rather than supporting them using your taxed income, you can pay them through the business. A greater portion of the household income becomes tax free, and it helps the company become more tax efficient too.

You can employ any member of your family, as long as they are of working age. They must play a reasonable role in the company, otherwise HMRC may challenge it.

Helps you stay below the higher rate tax bracket

Taking all the profits as a salary, or paying yourself lots in dividends, can all result in pushing you into the 40% tax bracket. Sharing the income between you like this could also help you stay below the threshold for paying higher rate tax – which is another plus!

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