Let’s focus on Directors owning their own companies.
A quick summary
Primary NI threshold is changing on 6th July 2022
Weekly – from £190 to £242
Monthly – from 823 to £1048
Annually – from £9880 to £12570 (which is also the income tax threshold)
That basically means an Annual amount of £11908 (3 months at £9880 and 9 months at £12570), £11908 is £992.33 per month (£12570 is £1047.50 per month).
So £992.33 will be below the Employee NI threshold.
However, the Employer NI threshold will be £9100 (£758.33 per month) and from that level Employers NI will be charged at 15.05% unless you have additional employees and are eligible for the Employment Allowance of £5000 (previously £4000).
Dividend Tax rates for 2022/23
Allowance £2000
Lower Rate 8.75%
Higher Rate 33.75%
Additional Rate 39.35%
National Insurance Rates for 2022/23
Class 1 to the Upper Earnings Level 13.25%, then 3.25%
Employer NI Rate 15.05%
Employment Allowance £5000
Here some examples
Example 1
Salary £12570
Dividends £2000 (dividend allowance)
Interest from company £1000 (savings allowance)
Total £15570
You will pay Class 1 Employee NI £87.72 (13.25% of (£12570 – £11908) [£662]) and your company will pay £522.24 (15.05% of (£12570 – £9100) [£3470])
Total NI Paid £609.96
The company will have saved 19% (at the lower rate) of (£12570 + £522.24 + £1000) x 19% = £2677.53 as these costs will be offset against profit
In order to get a dividend of £2000 the company will have been taxed £469.14 (19% of the gross amount)
Example 2
Salary £11908
Interest £1000
Dividends £37000
Employers NI will be £422.60
Dividend Tax will be £35000 – (£12570 – £11908) x 8.75% = £3004.58
In order to pay £37000 in dividends the company will need a profit of £45679 and will have paid 19% (assuming lower rate) which is £8679 corporation tax
Summary
In order to qualify for benefits including the state pension you have to earn above the Class 1 NI threshold
So it seems logical to opt for a Salary of £12570 (£1047.50 per month)
Above this level income tax starts at 20% and NI is 13.25% for the employee and 15.05% for the employer, overall thats 48.3% tax and NI (but the employer may be entitled to the employment allowance offsetting the employers NI and gross pay and employers NI are deductible against corporation tax)
If you have lent money to your company its worth paying some interest (at a commercial rate) as that is tax deductible for the company (saving 19% CT) and there is a savings allowance and in addition interest is not subject to NI, income tax starts at 20%
Dividends are better than salary because there is a £2000 allowance and then tax starts at 8.75%, but remember the company will have paid 19% CT on profits, so overall at lower rates of tax that 27.75% tax but dividends can only be paid if you make a profit or have profit reserves in the balance sheet.
If you are a client and want to try a specific combination perhaps adding other sources of income, let us know.
There will also be a calculator available when the system goes live on Monday for you to check your calculations online before you make your claim.
General information about the scheme
• To be eligible for CJRS an employer must agree with the employee that they are
a ‘furloughed worker’.
• Employees must be notified that they have been furloughed.
• Employees must be furloughed for a minimum of three weeks.
• The employee cannot do any work for the employer that has furloughed them.
• You can claim 80% of wages up to a maximum of £2,500 per month per furloughed employee.
• A separate claim is needed for each PAYE scheme.
• You can only claim for furloughed employees that were on your PAYE payroll on or before
19 March 2020.
• An RTI submission notifying payment in respect of that employee to HMRC must have been
made on or before 19 March 2020.
• You must have a UK bank account.
Watch our Video to find out how we are helping our clients to make claims
Check our website for all the latest information on government support and get free downloadable guides
By now you will have already processed your payroll year end and submitted the final RTI submissions.
You have to pay your PAYE by 19th April and issue P60’s by 31st May.
So the next main date is P11D Benefits in Kind! due by 6th July
Last year Dispensations ended and Payrolling Benefits became an option but you must be registered
If you choose to payroll you can tell HM Revenue and Customs (HMRC) online. You need to register online before the start of the tax year you want to payroll for.
You must add the cash equivalent of the employees’ benefits to their pay and then tax them through your payroll.
HMRC will make sure the value of the benefit is not included in your employees’ tax codes.
If you use the service you:
won’t need to use form P11D
still need to work out the Class 1A National Insurance contributions on benefits and complete form P11D(b)
You can exclude employees from payrolling once you’re registered, but you’ll need to send a P11D to declare the non-payrolled benefits.
Once the tax year has started you’ll have to payroll the benefits for the whole of the tax year, or until you stop providing them.
At the end of the tax year you’ll usually need to submit a P11D form to HM Revenue and Customs (HMRC) for each employee you’ve provided with expenses or benefits.
In the Budget 2016 George Osborne announced that as from April 2017 it will be the duty of the Public Sector to make sure Personal Service Companies and Intermediaries pay the correct tax.
The government announced at Budget 2016 that it will reform the intermediaries legislation (known as IR35) for public sector engagements. It will do this by moving the liability to pay the correct employment taxes from the worker’s own company to the public sector body or agency / third party paying the company. In partnership with stakeholders, HM Revenue and Customs will develop a new tool that will make the decision on whether or not the rules should apply as simple as possible and provide certainty. A formal consultation will be published later. [Technical Note]
The organisations checking intermediaries will include:
Government departments, legislative bodies, armed forces
Local government
NHS
Schools and further and higher education institutions
Police
The British Museum, BBC, Channel 4
Transport for London
Publically owned bodies
It will be the engagers duty calculate the deemed employment income.
Here are 3 examples…
Will this lead to higher taxes for contractors? will they be converted to employees?
The tidal wave of small businesses going through Auto Enrolment has now started with the peak being next year in 2016/17.
So what do you need to do before you stage?
Find out your staging date, this the date when your obligation under Auto Enrolment will start, the Pension Regulator calculator is a good place to start
Nominate a person to be the Pension Regulators key contact and register their name with the Regulator
Draw up a Project Plan and consider whether you need help (60% of companies currently staging have decided they do need help! and most businesses will start by asking their accountant to help with project management)
Choose a Pension Provider – Nest, Now Pensions and The Peoples Pension are the 3 largest
Makesure your Payroll can provide the analysis needed – Brightpay works with the providers shown below, does your payroll?
In addition you will need to work on elements of the Project Plan such as Assessing the Workforce, Letters to Employees, Considering Postponement etc
The NICs Employment Allowance was introduced in April 2014, for the purpose of supporting businesses and charities in helping them to grow by cutting the cost of employment. Eligible employers can claim the allowance, which reduces their Employer NICs bill by up to £2,000 a year. This is an ongoing allowance. Once an employer has claimed the allowance, they will continue to enjoy it in future years, without needing to do anything further. Over a million employers have benefited from the allowance since its introduction.
This measure will increase the Employment Allowance by £1,000 to £3,000 from April 2016. This means eligible business and charities will be able to claim a greater reduction on their employer NICs liability.
This is fantastic news for employers, but there is a potential sting in the tail.
HMRC plan to exclude one person businesses!
But many believe that HMRC’s plan won’t work because all you need to do is employ a family member or friend and then the one person should qualify for the allowance.
John Cullinane, CIOT tax policy director, said: “The government may find its plan to be ineffective in reducing employment allowance claims because it is open to abuse. It will simply have the effect of penalising single director-employee limited companies that are unable to, or do not know that they could, appoint another person as director or employee to claim the allowance.”
Five million people may have been billed incorrectly by HMRC.
You’ll find your tax code on:
your pay slip
your PAYE Coding Notice – you usually get this a couple of months before the start of the tax year and you may also get one if something has changed but not everyone needs to get one
form P60 – you get this at the end of each tax year
form P45 – you get this when you leave a job
Among those most likely to be affected are veterans who have taken a civilian job after leaving the Armed Forces, but who also draw a military pension. Pensioners with two pensions and those who have continued to work part-time after retirement are also more likely to be hit.
Taxpayers, who must complete their self-assessment tax returns before Jan 31, are being warned to check their paperwork again to make sure they are not affected.
Problems arise because various tax offices around Britain are failing to share information about taxpayers’ incomes on a central database.
People with more than one income, whether from pensions, PAYE employment or a mixture of the two, are being allocated their personal tax-free allowance multiple times. It means the tax codes issued for their various income sources are incorrect, so not enough tax is taken. Often the mistakes are discovered by HMRC years later, leading to unexpected tax demands. Telegraph
If you think your Tax Code is wrong you should tell HMRC as soon as possible using online form P2
The most common tax code for tax year 2015 to 2016 is 1060L (£10,600 being the annual income tax free allowance for 2015/16) – in 2014 to 2015 it was 1000L. It’s used for most people born after 5 April 1938 with one job and no untaxed income, unpaid tax or taxable benefits (eg company car).
most pensions, including state pensions, company and personal pensions and retirement annuities
interest on savings and pensioner bonds
rental income (unless you’re a live-in landlord and get £4,250 (£7,500 from April 2016) or less)
benefits you get from your job
income from a trust
dividends from company shares
So how can you pay less income tax?
Here are 10 suggestions…
Pension
When you pay into a pension you get income tax relief on your contributions .
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
40% Tax Rate
20% Tax Rate
Year
Pension
No Pension
% Diff
Year
Pension
No Pension
% Diff
1
£10,700
£6,252
71%
1
£10,700
£8,336
28%
2
£22,470
£12,954
73%
2
£22,470
£17,272
30%
3
£35,395
£20,131
76%
3
£35,395
£26,841
32%
4
£49,564
£27,808
78%
4
£49,564
£37,078
34%
5
£65,077
£36,013
81%
5
£65,077
£48,017
36%
6
£82,036
£44,773
83%
6
£82,036
£59,698
37%
7
£100,555
£54,119
86%
7
£100,555
£72,158
39%
8
£120,754
£64,081
88%
8
£120,754
£85,441
41%
9
£142,761
£74,692
91%
9
£142,761
£99,590
43%
10
£166,715
£85,987
94%
10
£166,715
£114,649
45%
11
£192,765
£98,000
97%
11
£192,765
£130,667
48%
12
£221,070
£110,771
100%
12
£221,070
£147,694
50%
13
£251,801
£124,337
103%
13
£251,801
£165,782
52%
14
£285,140
£138,740
106%
14
£285,140
£184,987
54%
15
£321,285
£154,024
109%
15
£321,285
£205,365
56%
16
£360,445
£170,233
112%
16
£360,445
£226,978
59%
17
£402,846
£187,416
115%
17
£402,846
£249,888
61%
18
£448,731
£205,621
118%
18
£448,731
£274,161
64%
19
£498,358
£224,901
122%
19
£498,358
£299,868
66%
20
£552,006
£245,309
125%
20
£552,006
£327,079
69%
Even when you consider:
Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
2. ISA
Individual Savings Accounts have been around for a few years and very soon the Help to Buy ISA will be launched
Top 10 facts and rules…
Its only available to ‘First Time Buyers’
‘First Time Buyers’ can only have one Help to Buy ISA with one provider
You can pay in £1,000 when you open the account and then save a maximum of £200 per month
The maximum government bonus is £3,000 (but you can lower amounts of bonus if you have less than £12,000)
The scheme will run for 4 years from the date it opens (Autumn 2015)
Couples can have a Help to Buy ISA each which means if they don’t want to wait 4 years could save £12,000 in 25 months where as a single saver would need 55 months
Unlike ISA’s where you open one per year, the Help to Buy ISA will continue for 4 years
You can withdraw funds but if its not to buy a home then you won’t get the bonus
More than 100,000 homes have now been bought with government backed schemes
You will be able to get them at banks and building societies
3. Salary Sacrifice
Salary Sacrifice is a very tax efficient way to give your employees benefits and the most popular benefits are Pensions and Childcare. I wrote a blog back in 2011 which explained how it can save 45.8% in tax and NI
HMRC decided on 9th April 2013 that it was time to “clarify” in their Manuals what are successful and unsuccessful salary sacrifice schemes and have added some further guidance. Their Staff are instructed not to approve schemes (Employment Income Manual EIM42772)….
You (HMRC) may get requests for advice:
on how to set up a salary sacrifice arrangement, or
on whether draft documentation will achieve a successful salary sacrifice.
You (HMRC) should not comment on either of these areas. Salary sacrifice is a matter of employment law, not tax law. The nature of an employee’s contract of employment is a matter for the employer and employee.
The specific updates are:
EIM42750 – Salary Sacrifice – updated – this contains the examples of schemes
EIM42777 – Contractual arrangements – this has interesting comments on childcare and pensions
4. Employment Expenses
As an employee you can claim tax relief for expenses incurred in doing your job, for example business mileage, cycling on business, hotels, meals, business phone calls, in fact anything as long as its business related
If your claim is less than £2500 you can make your claim using Form P87 http://www.hmrc.gov.uk/forms/p87.pdf if its more than £2500 you will need to complete a Self Assessment Return (you need to phone HMRC to request a Self Assessment Return – contact details below), if you know your UTR number you can register and file your Self Assessment Return on line.
5. Dividends
When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try the Dividend Calculator above to see how much difference it could make.
6. Tax break for Couples
A new tax break as launched this week from 6 April 2015, which will be eligible to more than 4 million married couples and 15,000 civil partnerships.
The Allowance means a spouse or civil partner who doesn’t pay tax – therefore is not earning at all or is earning below the basic rate threshold (£10,600) – can transfer up to £1,060 of their personal tax-free allowance to a spouse or civil partner – as long as the recipient of the transfer doesn’t pay more than the basic rate of income tax.
7. Tax Free Benefits
Getting tax free benefits will save you lots of tax, here some ideas…
Pensions – Up to £40k can be paid in to you pension scheme by your employer (2015/16) and you can use carry forward to pay in even more
Childcare – Up to £55 per week but check the rules to makesure your childcare complies (HMRC Leaflet IR115) – these rules are changing soon.
Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £121,200 or above.
9. Green Company Car
A calculator is available here: http://www.hmrc.gov.uk/calcs/cars.htm and rates are shown in the table below for zero emission vehicles and some of the lower CO2 vehicles.
10. Check your P800
The P800’s are likely to contain errors because:
Large amounts of data are manually input
Estimates especially for Bank Interest and Investment Income
So check the following carefully:
P60 – you get this at the end of each tax year
P45 – you get this when you leave a job
PAYE Coding Notice
P11D Expenses and benefits
P9D Expenses payments and income from which tax cannot be deducted
Bank and Building society statements
Pension Tax Deductions
Its expected that around 3 million people will be asked to pay more tax and around 2 million people will have overpaid.
Basically the current situation is that the first £30,000 of a payment which is paid in connection with the termination of employment is tax free, as long as it is not otherwise taxable as earnings. It sounds simple but can be complicated, here is a government example
The Office of Tax Simplication are currently consulting (until 16th October 2015) on changing the rules one solution is to make it more like redundancy payments, take a look at these examples
There will also be some anti avoidance rules that if you are re-engaged within 12 months in similar job with the same company the payments previously made would become subject to tax and NI.
It looks like we are in for some major changes, its not too late for you to have your say, click on this link
You pay National Insurance contributions to qualify for certain benefits including the State Pension.
You pay National Insurance if you’re:
16 or over
an employee earning above £155 a week
self-employed and making a profit of £5,965 or more a year
The Office of Tax Simplification is currently beginning a process of looking at merging National Insurance with Income Tax.
ACCA’s head of tax Chas Roy-Chowdhury warned that an alignment of NI and income tax rates would be crucial prior to a merger taking place.
Whilst This is Money reported…
Middle and high earners could see their tax bills jump under radical plans to merge income tax and National Insurance, a tax expert has warned.
People taking home £50,000 a year could be £230 worse off, but low earners on £20,000 would save more than £530, and those on £30,000 would come out around £380 ahead, according to snap research by Tilney Bestinvest on the potential tax shake-up.
Chancellor George Osborne wants to reduce ‘complexity’ in the tax system to make it clearer exactly how much people have to cough up, and has ordered the Office of Tax Simplification to see if there is a case for change.
This change is also likely to lead to changes to Pension tax relief reform, Your Money reported…
The government has already announced a consultation on the pension tax relief system, and I believe that a merger of income tax and NI would likely result in the floated idea of a pension with ISA-like tax treatment. This is because at present, a basic rate taxpayer gets 20% tax relief on pension payments but surely this would increase to 32% under a combined system. It seems illogical to increase tax relief at a time when they are actually trying to reduce the cost to the Exchequer. An equal tax treatment of ISAs and pensions could be a prelude to merging the two, potentially drawing ISAs into some form of limetime allowance.
