For your pleasure: sole trader vs company tax calcs (Google Sheets)

[TheCyclingProgrammer]

This is why I pay salary up to the income tax threshold. It also keeps my NICs topped up so, if there is still a state pension when my age group reaches whatever state mandated retirement age (probably 99 by the time I get there), I will at least receive enough for a cup of coffee once a fortnight. That and I have no issue with paying for the public services I use.

FWIW, you don't need to pay up to the personal allowance to gain a credit for state pension purposes - you simply need to pay above the lower earnings limit.

[Kugel]

Since you pay no NI on the extra £4K with the higher salary, for you it is a wash.

How exactly you avoid paying NI on extra £4K?

[ladymuck]

FWIW, you don't need to pay up to the personal allowance to gain a credit for state pension purposes - you simply need to pay above the lower earnings limit.

Yes I know.

[proudfeet]

Not once the higher threshold for employee NI kicks in.

You have no income tax on that extra £4K in salary, just as you had no dividend tax on it when it was dividends. Since you pay no NI on the extra £4K with the higher salary, for you it is a wash.

YourCo pays more NI at 13.8, but saves 19% on (salary + ERNI). So your company saves net about 8%. If you have two employees and claim the employment allowance, it's even better to go to the higher salary.

This is moot if the NI threshold increase ends up not happening, of course.

Can you break down how you worked out the 19% that you save?

Am I right in thinking that based on the CURRENT rates, my spreadsheet is correct (i.e. it shows the most tax efficient method) if we change the 17% CT rate to 19%?

[proudfeet]

How exactly you avoid paying NI on extra £4K?

I also would like to know this.

[WordIsBond]

How exactly you avoid paying NI on extra £4K?

I was wrong. Somehow it entered my calcified ancient brain that the NI threshold was going up to £12.5K. It's not, it is going up, I believe, to £9.5K. So you avoid paying NI on approximately the first £1K of the higher salary (from about £8.5K to 9.5K). That means the most tax-efficient salary will be £9.5K, for most people.

[WordIsBond]

Can you break down how you worked out the 19% that you save?

For every pound in salary that you pay, your company saves 19% Corporation Tax on that pound in salary. If we are talking about pounds that are over the NI threshold, then your company pays 13.8% in NI, but NI is a business expense and so you reclaim 19% of that 13.8% in CT savings.

So the CT savings is 19% * (salary + NI). Plugging in the numbers, every pound of salary over the NI threshold saves 19% * (1 + 0.138) in CT, or £0.216.

So, for every pound over the NI threshold, your company will save about 8% in tax (netting out the CT and NI). For converting income below the personal allowance from dividends to salary, there is no income tax difference. So going from an 8.5K salary to 12.5K costs nothing in income tax.

For salary above the NI threshold but below the personal NI threshold, then, there's no cost to you personally and savings to your company of 8% by reducing your CT. For salary above the personal NI threshold (9.5K) but below the personal allowance (12.5K), the cost to you personally is 12% (NI) and the savings to your company is 8%, which makes it not worth it.

So the most tax efficient salary for LtdCo contractors will be 9.5K. If you have more than one employee and are using the employment allowance, it will be 12.5K.