As a director and shareholder of your own company you can decide how much salary to pay yourself each month in order to use your tax-free personal allowance in the most tax efficient way. Any further funds you need can be extracted as a dividend if the company is making a profit.

If you are a director of your company and you don’t have a contract that sets out terms of employment with the company, you don’t have to pay yourself the national minimum wage. So how much should you pay yourself?

For 2014/15 if you were born after 5 April 1948 you have a tax free personal allowance of £833 per month (£10,000 per year). You could take a salary at that level and pay no income tax, assuming you have no other taxable benefits from the company such as a car.

However, you will pay national insurance (NICs) on that salary as the NICs threshold is only £663 per month. From a gross salary of £833 the company must deduct NI of £20.40 and set-aside employer’s NI of £23.46 on top. The company will have an employment allowance of £2,000 for the year to set against its employer’s NI due on all its employees, so it won’t have to pay over employer’s NI until that £2000 is used up.

If you take a salary of just above the NI lower earnings threshold of £481 per month, you will get an NI credit towards your state pension, but you don’t pay any tax or NI. However, at that annual salary level (£5,772) you will be “wasting” £4,228 of your tax free personal allowance, unless you have other income to cover it.