For companies, setting the directors' salaries is down to the directors and shareholders. There are tax benefits (but also potential risks with keeping salary low) we'd suggest thinking about the following:
National insurance contributions - you’ll want to ensure that you're paying enough to be part of the national insurance scheme.- Minimum wage – If you've an employment contract with your business then legally any salary must meet minimum wage for hours agreed in your employment contract.
- Personal income needs – How much do you and your family need each month to live on? Assessing your monthly outgoings is important when setting salary. We'd suggest a salary is at least enough to cover the contribution you make to the household each month; paying less tax overall is all well and good but practical living is also important. If you’re disciplined and have enough personal wealth to wait for your dividends then great - but if you start dipping into company money to top up a low salary then you risk HMRC assessing dividends as extra wages.
- Is the salary “commensurate” with the nature of the role? - What might someone expect to earn in your job role? A challenge on this point from HMRC is unlikely to be successful but setting an appropriate salary is often viewed from a moral or commercial standpoint rather than tax perspective.
- IR35 status (freelancers only) – Where there is uncertainty if IR35 applies, freelancers often decide paying a higher salary reduces the risk of investigation, or potential penalties and interest if a future decision goes against them.