£732 VS £792, NI, etc

[JHamp82]

Its about paying less tax. Dividends are paid after 19% CT. For salary after £732 the company pays 13.8% NI and after £797 the employee also pays 12% NI so if just paying 13.8% you will pay less tax on that salary than divs but after you will pay more.

If the company is eligible then Employment allowance can be claimed removing the 13.8% Employer NI liability as well I think.

[d000hg]

Aha, I'd not considered the extra salary would slightly reduce CT so that makes sense when ER is in play.

Thanks for the help.

[Craig@Clarity]

In a nutshell, if you're a sole director/employee, you can pay the secondary threshold amount of £737 per month (£8,844 p.a.) and no income tax or employees or employers NIC is attracted. Compare that the primary threshold of £797 per month (£9,564 p.a.). There is still no income tax or employees NIC but there will be employers NIC of £99.36. With CT saving, the total cost to HMRC is £80.48 but you do get £720 more in your back pocket over the course of the year paying £797 per month as oppose to £737.

[Maslins]

One is based on the primary threshold (when employee NICs kick in), the other is based on the secondary threshold (when employer NICs kick in). A few years ago these figures matched, but for whatever reason they've recently deviated. Accountants have differed on what they consider the "best" salary.

The extra salary gets CT relief, doesn't suffer income tax, doesn't suffer employee's NICs, but potentially does suffer employer's NICs (depends on other employees hence qualification for employment allowance). Oversimplifying a bit, in most one person companies that small extra salary is saving 19% corporation tax whilst only suffering 13.8% employers NICs, so a small overall saving to be had.

Where there's two staff, it's a no brainer. The slightly higher salary is more tax efficient, and the employment allowance negates the employer's NICs, so there isn't even the extra hassle of making that one small payment in April following the tax year. When there's just one person on the payroll, it's still marginally more tax efficient, but you've got the (small) faff of making a payment of employer's NICs in the April following the tax year. Some people will say the saving is trivial and they'd rather avoid the faff, others figure it's a teeny extra faff and easy small saving so to go for it. The difference is negligible, so really it's just one for the geeks/pedants to worry about!

[d000hg]

Yeah was there a period where 'PSCs' did get NI relief?

So I can understand the higher salary is still net-zero due to E.R., but not why it is a little more efficient Maslins ? I can see where the 737/797 monthly figures come from in the link ladymuck shared (ta) but not why one is better/worse than the other?

[ladymuck]

If you're the sole person on the payroll you typically won't get the employment allowance.

d000gh said his wife's business has other employees...

[Maslins]

As the NI would be offset against the employers allowance it would still be a net zero cost to the company?

If you're the sole person on the payroll you typically won't get the employment allowance.

[ladymuck]

As the NI would be offset against the employers allowance it would still be a net zero cost to the company?

[Maslins]

The slightly higher salary triggers a small employER NIC liability in most cases (but not employEE NIC liability). It's therefore a teeny bit more faff, as you likely will need to make a piddly payment to HMRC in the April just after the tax year, which you typically wouldn't at the lower salary. However, it's a little bit more tax efficient.

I can see valid reasons why either salary would be recommended. For this tax year and last tax year (where employee and employer NIC thresholds deviated) we've tended to recommend the higher salary...but you're not gaining/losing significantly either way.

[ladymuck]

The thresholds are a smidge higher in 2021/22:

https://www.gov.uk/government/public...-contributions

But they're quoting the wrong rates for 2021/22 per the table in the link.

[d000hg]

In the 2020/21 tax year, both my and my wife's companies were paying us salaries at the £732pcm level, which I had always thought was the magic number where you got NI 'stamps' without it costing anything.

Her employer has recommended a salary for 21/22 of £792:

Would you like to increase to £792 per month? This would be above the lower NI threshold (therefore earning qualifying years), and below the primary threshold (not incurring employee NI). A small of Employer NI (£7.59) would be offset by the employment allowance.

I'm unclear where this comes from... I am being advised to increase £732 a trifle to get a salary of £8840 so why would £9504 be as good/better?

Her business does have other employees, if that is a factor? Clearly these are small differences but I like to see where they've come from especially as we have had conflicting advice on the same issue for our respective businesses from the two accountants before. (I understand where £8840 comes from)