Budget: £2k NI allowance

[VectraMan]

Does this mean that if you're inside IR35, you'll be another 2K better off if you operate via a limited company than going through a brolly? (Hypothetical question, doesn't affect me)

I've never quite understood how inside IR35 works, but yes it does sound like it. Also, anyone following the (completely unproven) advice of paying a slightly higher/minimum wage salary in the hope of reducing the chances of an IR35 investigation is going to be better off.

But I think they'll explicitly exclude directors too.

[Wanderer]

But I think they'll explicitly exclude directors too.

What if your wife isn't a director though.

[Maslins]

Hi alan,

OK. But isn't it better to pay employees NI (12%) and no employers NI (because of the refund) than leave it as dividend and pay 20% CT?

I'm sure there are reasons of course because NW usually get this spot on.

You're potentially forgetting personal tax at 20% of the salary above the personal allowance (hence for some of it you're paying 12% E'ees NI + 20% PAYE vs saving 20% CT).

However, I accept that recently the personal allowance has risen faster than the NIC threshold. Therefore for people with no savings/other non dividend income which could benefit from the slack in the personal allowance, it might be worth paying up to the personal allowance. That would then suffer E'ees NICs at 12%, nothing else, and gain CT relief at 20%. The saving will be fairly trivial, and you'd be losing the non-financial benefit of having to keep track of what PAYE you owe/have paid. Not hard admittedly, but for many clients a benefit of paying just below the NIC threshold is that PAYE/NIC is one tax they don't have to keep track of.

[psychocandy]

You're potentially forgetting personal tax at 20% of the salary above the personal allowance (hence for some of it you're paying 12% E'ees NI + 20% PAYE vs saving 20% CT).

However, I accept that recently the personal allowance has risen faster than the NIC threshold. Therefore for people with no savings/other non dividend income which could benefit from the slack in the personal allowance, it might be worth paying up to the personal allowance. That would then suffer E'ees NICs at 12%, nothing else, and gain CT relief at 20%. The saving will be fairly trivial, and you'd be losing the non-financial benefit of having to keep track of what PAYE you owe/have paid. Not hard admittedly, but for many clients a benefit of paying just below the NIC threshold is that PAYE/NIC is one tax they don't have to keep track of.

Yes of course assuming no other non-div income. Im talking about where income is still below the £10K and all other income is in dividends. But I see that savings interest etc will come into it and any of that goes over £10K will be disadvantageous because tax will then accrue.

The way I've always seen it is you're throwing away the rest of your tax free allowance because its better to do this than pay both NI on it?

OK. Not sure of the recommended salary for 2014 to avoid NI but, say its around £8000.

Scenario 1
Salary £8000
NI £0
Dividend £2000
CT £400

Total lost = £400

Scenario 2
Salary £10000
NI (12% but not employers NI) £240
Dividend left £0
CT £0

Total lost = £240

Is this right? So you'd be £160 better off and a warm and fuzzy feeling of having paid some NI.

[minstrel]

Yes of course assuming no other non-div income. Im talking about where income is still below the £10K and all other income is in dividends. But I see that savings interest etc will come into it and any of that goes over £10K will be disadvantageous because tax will then accrue.

The way I've always seen it is you're throwing away the rest of your tax free allowance because its better to do this than pay both NI on it?

OK. Not sure of the recommended salary for 2014 to avoid NI but, say its around £8000.

Scenario 1
Salary £8000
NI £0
Dividend £2000
CT £400

Total lost = £400

Scenario 2
Salary £10000
NI (12% but not employers NI) £240
Dividend left £0
CT £0

Total lost = £240

Is this right? So you'd be £160 better off and a warm and fuzzy feeling of having paid some NI.

That's how I see it working out too.

[Nixon Williams]

Hi alan,

OK. But isn't it better to pay employees NI (12%) and no employers NI (because of the refund) than leave it as dividend and pay 20% CT?

I'm sure there are reasons of course because NW usually get this spot on.

There will be a marginal benefit of taking the salary to the £10,000 PAYE threshold, although this marginal benefit will reduce further if you are a higher rate taxpayer.

Of course under RTI (Real Time Information) you will also have to make quarterly payments of the NIC to HMRC.

Remember that this is from April 2014, the most efficient salary for 2013/14 is still £7,696.

[minstrel]

The saving will be fairly trivial, and you'd be losing the non-financial benefit of having to keep track of what PAYE you owe/have paid. Not hard admittedly, but for many clients a benefit of paying just below the NIC threshold is that PAYE/NIC is one tax they don't have to keep track of.

A couple of hundred quid for doing relatively little isn't that trivial in my book. As I understand it, with RTI any payments need to be reported even if they are below the NIC threshold.

There is therefore relatively little admin saving in paying below the NI threshold than paying above. The only real difference is whether you want to spend a couple of minutes every quarter sending HMRC a small BACS payment.

[psychocandy]

A couple of hundred quid for doing relatively little isn't that trivial in my book. As I understand it, with RTI any payments need to be reported even if they are below the NIC threshold.

There is therefore relatively little admin saving in paying below the NI threshold than paying above. The only real difference is whether you want to spend a couple of minutes every quarter sending HMRC a small BACS payment.

Agreed. But as NW say, its 2014. My figures were guesses - not sure what the recommended salary for 2014 will be?

£160 a year = £40 a quarter saved. Surely you still have to make a PAYE return anyway even if its a nil one so no extra work for accountant? Only difference is having to make a payment each quarter of NI - £60 based on my example.

Hmmm. 2 mins making a payment to save £40 once a quarter.....

And also the percieved (by some) advantage of actually paying 'some' NI (arguable point this one as to whether it makes any odds!).

[minstrel]

The most efficient salary for 2013/14 is still £7,696.

Alan - can you please share how you work out the £7,696 figure for 2013/14?

I worked it out as £7,752 (£646 x 12).

Primary threshold £149 * 52 weeks = £7,748

£7,748 / 12 = £645.67. Round it up to £646 as the NI tables seem to allow it.

[psychocandy]

There will be a marginal benefit of taking the salary to the £10,000 PAYE threshold, although this marginal benefit will reduce further if you are a higher rate taxpayer.

Of course under RTI (Real Time Information) you will also have to make quarterly payments of the NIC to HMRC.

Remember that this is from April 2014, the most efficient salary for 2013/14 is still £7,696.

And I guess you need to make allowance for savings/other income too?
If you pay salary up to £10K and forget about, say £1000 interest or something then you're going to end up paying NI PLUS tax on the £1000.

(which would be 12% more than you need to really - £120 lost in this case)

In a way, I can see why accountants recommend this. Gives you a bit of slack before you start paying tax.