If the director shareholder has no other income and the EA is available, the optimum position will be to take a salary equal to the personal allowance (£883.33 per month) and to withdraw further profits in the form of dividends. Although this approach will result in the director paying some employees’ (primary) Class 1 NI, the NI bill will be outweighed by the corporation tax deduction in respect of the additional salary. As long as the director remains a basic rate taxpayer, i.e. net dividends of no more than £28,606 for the year, no actual tax will be payable in respect of the dividends as the liability is exactly matched by the associated tax credit.
The employers’ NI of £343.34 (13.8% (£10,600 – £8,112)) that would otherwise arise is fully offset by the EA. The remainder of the EA of £1,656.66 (£2,000 – £343.34) is lost.
Why not make full use of the EA? The EA of £2,000 is equal to employers’ NI on earnings of £14,493 in excess of the secondary NI threshold. However, while paying a salary of £22,605 (£14,493 + £8,112) would fully utilise the EA, this is not a worthwhile strategy as the associated primary class 1 NI £1,745.40 (12% (£22,605 – £8,060)) and tax of £2,401 (20% (£22,605 – £10,600)), totally £4,146.40, exceeds the corporation tax deduction of £2,909 (20% (£22,605 – £8,060)) on the salary paid in excess of the PT.