Due to the budget changes announced in October, from April 25 employers will pay National Insurance contributions on an employee's earnings above £5,000 at a rate of 15%. The earnings amount was reduced from £9,500 and the rate NI rate increased by 1.8% from the last tax year.
To offset this increase, the employment allowance (amount of employers NI you do not have to pay) has been increased from £5,000 to £10,000. This means the first £10,000 of employer’s national insurance is not payable.
However, there is an exception. If you are currently a sole director on the payroll, you are not entitled to the employment allowance. This had little or no effect when the earnings amount was £9,500. However, this does have an impact on you now.
There are some options to consider going into the new tax year to maximise your tax efficiency...
Pay yourself £5,000 per annum (£416.66 a month).
This option means that on your salary you won't have any personal/employee tax obligations or employer national insurance obligations.
But your salary will fall under the lower earnings limit of £6,500 so you will NOT achieve a qualifying year for your state pension.
You'd earn the remainder of your income through dividend payments, this is the most tax efficient way of paying yourself if your main goal is to avoid NI obligations.
However, the company would have an increase in corporation tax of around £855.
Pay yourself £6,500 per annum (£541.66 a month).
This option means that on your salary you won't have any personal tax obligations or employee NI , but you will have a small employer NI obligation of £225 a year.
This salary is above the lower earnings limit so you will achieve a qualifying year for your state pension.
You'd earn the remainder of your income through dividend payments, this is the most tax efficient way of paying yourself if you wish to achieve a qualifying year at the lowest tax/NI cost.
The company would still have an increase in corporation tax of around £570.
Pay yourself £12,570 per annum (£,1047.50 a month).
This option means that on your salary you won't have any personal tax obligations or employee NI, but you will have an employer NI obligation of £1,135.50 a year.
This salary is above the lower earnings limit so you will achieve a qualifying year for your state pension.
You'd earn the remainder of your income through dividend payments, this is the most tax efficient way of paying yourself if your main goal is to leverage your full personal allowance.
The company will save £1,654.05 in corporation tax offsetting the NI increase.
Alternatively, if you have 2 or more directors on payroll, or 1 or more additional employees, then you will be eligible for Employment Allowance which would cover your first £10,000 of employer NI. If this option is possible then the following will apply:
Pay yourself £12,570 per annum (£1047.50 a month).
On your salary you won't have any personal tax obligations, and you will utilise your full personal allowance.
You won't pay employee NI as the threshold is still £12,570 and you won't pay employer NI as the employment allowance will cover the first £10000.
We're here to help you make the best choice for you and your employees, maximising your tax efficiency for the new tax year.
If you would like to ask us any questions please contact either Leanne Pearson or Kris Clayton on 01663 743800 or email leanne@claytoncca.co.uk or kris@claytoncca.co.uk
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