Reply to: Advice on setting salary level

[WordIsBond]

Thank you for the advice. One additional question: given I've been on £14k for a few years and paying tax and NI, now moving to a £8k is a large reduction of salary, will this catch the tax people's attention and cause unnecessary troubles(e.g. they may decide to audit me because of this)?

NLUK answered this, but since you directed it to me, I agree with his answer.

My accountant has also recommended that my salary should be £11k and not £8k, on the basis of 2 lts director setup. Are they in effect wrong ? This has got me worried now

You got an answer from missinggreenfields which is generally correct. I'll add the following caveats:
1) Do you have any other non-interest/non-dividend income, or interest income above £1K? If so, that could affect whether £11K is the right number.
2) Look at what I said above about BIKs. That could potentially change the dynamic in some cases. Ask your accountant, in that case.

But in general, if you are eligible for Employment Allowance, £11K would be better than £8K.

[northernladuk]

Truth be known, I am still a little unsure around all of this now.

You ain't kidding there lol. I went back and had to check mine again after the umpteenth set of numbers appeared.

[kaiser78]

This... When they (am talking to Kaiser78 here) give you a figure they should be able justify it and you should be able to understand it. To say they give you a figure of 11k and you don't understand why isn't that clever when you are responsible for it. It's not wrong, it's just based on some assumptions you should have understood

Yes, you are very right. And I thought I did understand it and was fine with the reasoning of £11k until I read this thread, which has then confused me. It seemed to be going against what had been explained to me, ie taking £8k only instead of £11k and not taking the EA.

Truth be known, I am still a little unsure around all of this now.

[northernladuk]

If your company is claiming the EA, then they are right. If your company is not claiming the EA, then they aren't right.

This... When they (am talking to Kaiser78 here) give you a figure they should be able justify it and you should be able to understand it. To say they give you a figure of 11k and you don't understand why isn't that clever when you are responsible for it. It's not wrong, it's just based on some assumptions you should have understood

[missinggreenfields]

My accountant has also recommended that my salary should be £11k and not £8k, on the basis of 2 lts director setup. Are they in effect wrong ? This has got me worried now

If your company is claiming the EA, then they are right. If your company is not claiming the EA, then they aren't right.

[kaiser78]

So if you are paying for anything that could be treated as a BIK and your accountant hasn't asked you about this and moved you to paying it through the company, then once again, maybe you need to think about another accountant. But if you do have any BIKs, and he is still recommending £11K salary, time to contact somebody who has a brain to go with the title "accountant."

My accountant has also recommended that my salary should be £11k and not £8k, on the basis of 2 lts director setup. Are they in effect wrong ? This has got me worried now

[ASB]

If you want to wring out every last penny the the question is at what point the additional NI paid exceeds the corporation tax saved.

This is around the 8,800 mark. Obviously the calculations are different if the employers allowance can be obtained.

[northernladuk]

Thank you for the advice. One additional question: given I've been on £14k for a few years and paying tax and NI, now moving to a £8k is a large reduction of salary, will this catch the tax people's attention and cause unnecessary troubles(e.g. they may decide to audit me because of this)?

Nope. Plenty of people take big rises and falls in salary. 6k isn't a lot. Even if they do you aren't doing anything wrong.

[ian2013]

OP, let me translate that for you into plain English. Here's what Alan really means:
"Your accountant is obviously rubbish and doesn't know what he's talking about. But since I'm an accountant, too, and don't want to be seen bashing another accountant, and since I don't know quite every detail of your situation, it's a little awkward for me to say so explicitly. Since WIB said it already, I'll just refer you to his comment."


Honestly, I think you need another accountant. My accountant isn't a classic contractor account and costs more, makes sense for me because of my business but probably wouldn't make sense for you. Several I've noticed contribute here frequently that seem to know what they are about. Alan is one, Jessica at Whitefield Tax, Martin at Contratax (first guy I'd contact if I were changing, probably), Chris Maslin. There's probably others I'm forgetting because I'm getting old. Nixon Williams seems to have a very good reputation among posters here. One frequent poster here shills for Gorilla Accounting all the time, he's obviously very happy. SJD used to be popular but based on comments not so much anymore.

There's a whole thread at the top of this forum that includes local recommendations if you want someone face to face.

Edit: Heh, heh. Michael popped in while I was posting. Yeah, he seems to know his stuff, too. I said I'd forget some.

Thank you for the advice. One additional question: given I've been on £14k for a few years and paying tax and NI, now moving to a £8k is a large reduction of salary, will this catch the tax people's attention and cause unnecessary troubles(e.g. they may decide to audit me because of this)?

[WordIsBond]

That would appear to betray a fundamental lack of basic knowledge. If you pay £8060, you pay no NI but your benefits are protected. I'd be concerned about what else
he doesn't know.

And some good advice from WordIsBond up there.

OP, let me translate that for you into plain English. Here's what Alan really means:
"Your accountant is obviously rubbish and doesn't know what he's talking about. But since I'm an accountant, too, and don't want to be seen bashing another accountant, and since I don't know quite every detail of your situation, it's a little awkward for me to say so explicitly. Since WIB said it already, I'll just refer you to his comment."


Honestly, I think you need another accountant. My accountant isn't a classic contractor account and costs more, makes sense for me because of my business but probably wouldn't make sense for you. Several I've noticed contribute here frequently that seem to know what they are about. Alan is one, Jessica at Whitefield Tax, Martin at Contratax (first guy I'd contact if I were changing, probably), Chris Maslin. There's probably others I'm forgetting because I'm getting old. Nixon Williams seems to have a very good reputation among posters here. One frequent poster here shills for Gorilla Accounting all the time, he's obviously very happy. SJD used to be popular but based on comments not so much anymore.

There's a whole thread at the top of this forum that includes local recommendations if you want someone face to face.

Edit: Heh, heh. Michael popped in while I was posting. Yeah, he seems to know his stuff, too. I said I'd forget some.

[Michael at BI Accountancy]

If it were me, I'd be asking my accountant why he recommends £11K instead of £8K, since it costs extra taxes and the extra hassle of PAYE, and if the answer weren't satisfactory, I'd be thinking this accountant doesn't know enough for me to trust him in future, and be moving. It is hard for me to think of any satisfactory answer an accountant could give.

This!

Also how did the £14k come about??

[Alan @ BroomeAffinity]

Advice on setting salary level

When I asked him about it, he said that he'd suggest his clients to make national insurance contribution to qualify for state benefits. Now I'm thinking whether he knows enough to be a competent accountant.

Ian

That would appear to betray a fundamental lack of basic knowledge. If you pay £8060, you pay no NI but your benefits are protected. I'd be concerned about what else
he doesn't know.

And some good advice from WordIsBond up there.

[ian2013]

Many thanks to you all for the information and advice. The salary of £14k was suggested by my accountant a few years ago when I first switched to contracting from permanent employment. The accountant was recommended to me by a friend. I didn't know much and haven't paid much attention to it until now. Now he is suggesting me to move to £11k, so I did some research and found the £8k proposal. When I asked him about it, he said that he'd suggest his clients to make national insurance contribution to qualify for state benefits. Now I'm thinking whether he knows enough to be a competent accountant.

One more question is that: I've been paying myself £14k for the last few years, now if I drop to £8060, will that attract unwanted attention from HMRC as I'm taking a big pay cut and pay virtual no tax to them?

Ian

[WordIsBond]

Hi, Ian. Well-constructed post, most people who ask this question don't mention other income. It's clear you've got a pretty good handle on the issues. A few specifics:

1. Yes, your accountant's advice would cost you a few quid, but not very much. Yes, you'll pay 13.8% employer contribution on about £300 if you take a salary of £11K. You'll also pay 12% employee NI. On the flip side, you reduce company profit by about £3.4K (£3K extra salary plus about £400 employer NI), so you save around £680 in corporation tax, which virtually negates the impact of the extra NI payments.
2. An additional drawback is that you then have to make regular PAYE payments, which would be unnecessary if you use a salary of £8060.
3. State pension eligibility is based on annual earnings around £5600 (don't remember the exact amount, you can google it), so that is irrelevant to this question.
4. One other factor to consider is if you have any Benefits-in-Kind, that would definitely point towards the lower salary. I'll elaborate below.
5. Your personal contributions to a pension would be limited to the amount of your salary. However, in most cases it is going to be more efficient for contributions to a pension to be made by your company (since doing so reduces profit and so saves on corporation tax) rather than by you personally. If that is done, your company can contribute £40K / year, at least for now (that may change in future). So if you use company pension contributions to build your pension fund, salary level is irrelevant.

If it were me, I'd be asking my accountant why he recommends £11K instead of £8K, since it costs extra taxes and the extra hassle of PAYE, and if the answer weren't satisfactory, I'd be thinking this accountant doesn't know enough for me to trust him in future, and be moving. It is hard for me to think of any satisfactory answer an accountant could give.

Benefits-in-Kind. Suppose you are on a health kick, and have private medical insurance and a gym membership. Without going into all the details, because I don't have time and because your accountant can and should do this for you, it can be more tax efficient to have your company pay these for you, as a Benefit in Kind, rather than for you to pay them out of your personal income (which is after corporation tax and dividend tax have been paid). But I believe the tax efficiency is completely lost if you have a salary of £11K rather than £8K, because then there is not only employers NI to be paid, but also personal income tax at 20% on the BIK, and those combine to be greater than the 20% corporation tax and the dividend tax. If your salary is £8K, you don't have any income tax on the BIK (as long as it doesn't breach the £11K threshold), and so the only tax due is employers NI, which is less than the combined corp tax/div tax which would have to be paid if you pay it personally.

So if you are paying for anything that could be treated as a BIK and your accountant hasn't asked you about this and moved you to paying it through the company, then once again, maybe you need to think about another accountant. But if you do have any BIKs, and he is still recommending £11K salary, time to contact somebody who has a brain to go with the title "accountant."

[AMS Accountants]

Most tax efficient salary

Hi,

I need some advice on setting salary level for the year 2016/2017.

I contract through my own ltd company and my partner has 30% company shares (but she is not an employee so I'm effectively one man band). I have been paying myself a salary of £14000 for the last few years and draw the rest in dividend. The only other income is bank saving interest (a hundred pound at most). My accountant recently suggested me to move to a salary level of £11000 saying that it will be more tax efficient as I don't have to pay any income tax. But I read that I can also take a salary of £8,060 which means I don't have to pay any tax or national insurance at all. However if I do take a salary of £11000 as my accountant suggested, then given I won't be able to have any Employment Allowance from this year, so I will have to pay both employer's and employee's NIC (£750 in total, though with the savings on corporation tax, the net loss is less) which means I will be worse off. I'd like to know if my accountant's suggestion has any merits? If I take a salary of £8060 (against my accountant's advice), will it affect my state pension or making volunteering contribution to my pension given I pay no national insurance? Any other potential pitfalls?

Thanks in advance.

Ian

Best salary for 2016/17 is £8,164 (£157 a week). This generates a small employee NI bill of around £13 and entitles you to state benefits.

Last year it used to be £10,600 but HMRC have scraped the employers allowance of £2k for sole director companies.