Salary

PeterJames123

Hello,

I have seen a lot of limited companies who have just 1 director paying them selves £8,788 For the 2020/21 tax year, if you pay yourself an £8,788 salary, am I right in thinking you will pay no income tax or National Insurance at all? If that is the case what will happen after 10 years of paying no Tax & NI in terms of a pension? Why is this so common as there must be a benefit to it apart from saving the TAX and NI as long term they will bound to suffer without a pension. Thanks

oldbikebloke

what you have missed is that if an employer pays its employee more than the "lower earnings limit" (LEL) then the employee is given a national insurance "credit" even though neither employee nor employer physically pay any actual NI because the salary paid is below the "primary threshold" (PT) above which the tax rate actually takes deductions from the salary. 
https://www.gov.uk/government/publications/rates-and-allowances-national-insurance-contributions/rates-and-allowances-national-insurance-contributions

that is why, if the company is the only source of income for the director, it is standard tax advice to base the director's remuneration on the "director's minimum" and make up the rest using dividends  
LEL for 20/21 is £520/month (6240 / yr)
PT is £792/mth (9,504/yr)

income tax threshold is 12,500, so anyone earning between £6,240 and up to £9,504 per year pays neither income tax nor NI but still gets a full state pension qualifying year credit at zero cost to themselves.

Obviously this really only works where the employee is a shareholder and therefore the bulk of their actual income can be taken as dividends. Which is of course the position for one person limited companies.