Company Directors and the Minimum Wage
For several years accountants have advised clients who are directors and owners of limited companies to adopt a policy of “low salary – high dividend”. By adopting this policy in 2015/16 company directors could have paid themselves a tax free salary of £10,600 and a tax free dividend of £28,606, a total of £39,206 tax free income. Even in the current tax year after the changes in the way dividends are taxed, a company director can still pay himself or herself a salary of £11,000, a tax-free dividend of £5,000 and a £27,000 dividend taxed at 7.5%, leaving an after-tax income of £40,975.
However, if you take a small salary from your company there is a danger of falling foul of the national minimum wage (NMW) or the new national living wage (NLW) regulations which came into operation on 1 April 2016 and apply to those aged 25 and over. The NLW rate is £7.20 per hour, so if a director spends, say, 35 hours a week actively managing his or her business, the total salary due for 2016/17 will be: 35 x 52 weeks x £7.20 = £13,104. Fortunately this is not hugely higher that the optimal salary of £11,000 but will still result in unwelcome national insurance charges.
Where wages are too low, HMRC will force the company to make up the shortfall. Bigger wage payments may result in bigger national insurance bills for both the company and the director. There is also a penalty equivalent to 200% of the unpaid wages with a maximum penalty of £20,000 per worker. Those found guilty will also be considered for disqualification from being a company director for up to 15 years.
However, the key point to note about the NMW/NLW is that it only applies to directors who have a contract of employment . Due to the informal set up in many small companies, there may be some uncertainty as to whether an employment contract exists between the director and the company (employment contracts do not need to be in writing). However, it is generally accepted amongst the accountancy profession that if you do not issue yourself with an explicit contract of employment the minimum wage regulations will not apply.
If you have any questions about the minimum wage as it affects company directors or any other payroll matter, please contact us on 01869 222830 or complete the form below.